By Wayne Cole
SYDNEY (Reuters) – The dollar was on the defensive near nine-week lows on Thursday as a decidedly dovish outlook from the U.S. Federal Reserve gave a green light for the global reflation trade.
The setback allowed the euro to crack major trendline resistance at $1.2114 and power up to the highest since late February at $1.2135. The break opened the way to bull targets at $1.2196 and $1.2242.
Fed Chair Jerome Powell quashed speculation about an early tapering of asset buying, saying it was “not time yet” to begin talking of it, and employment was still a long way short of where it needed to be.
“The risk is the Fed is very cautious and delays taking the first steps to normalising policy,” said Joseph Capurso, head of international economics at CBA. “Low interest rates amid an improving U.S. and global economy is a recipe for the dollar to continue decreasing.”
Even the outperformance of the U.S. economy had a sting in the tail for the dollar as it sucked in imports and drove the trade deficit to record highs in March.
“That surge implies the U.S. current account deficit was around 4% of GDP in Q1, a significant weight on the USD in the medium term,” said Capurso.
It could also temper any reaction to an upbeat U.S. GDP report due later on Thursday, where market forecasts are for annualised growth of a whopping 6.1%.
The closely-watched Atlanta Fed’s “GDP Now” estimate is that GDP expanded by 7.9%, suggesting considerable upside risk.
The Fed’s dogged dovishness was a marked contrast to the Bank of Canada which has already begun to taper its asset buying, sending the dollar sliding to a three-year trough on the loonie at C$1.2303.
Another notable break lower came against the Norwegian crown, where the dollar hit its lowest since October 2018 at 8.1645 crowns.
The crown has been carried higher by rising oil prices as the global economic recovery boosts demand for commodities, a trend that is also benefiting the Australian and New Zealand dollars.
The dollar also shed much of the week’s gain on the yen, falling back to 108.45 from Wednesday’s top of 109.07. A holiday in Japan could keep it contained in Asian hours.
Against a basket of currencies, the dollar was down at a near nine-week low of 90.554, and a long way from the rally peak of 93.439 hit at the end of March.
(Reporting by Wayne Cole; Editing by Shri Navaratnam)
