Dollar holds firm as Powell speech day dawns

August 26, 2022: The dollar held onto recent gains against the euro and sterling on Friday ahead of Federal Reserve Chair Jerome Powell's widely-anticipated speech, which traders hope will offer clues on the U.S. central bank's tightening plans.

The euro was at $0.9966 in early Asian trade, having failed in several attempts this week to break back above parity against the dollar. It fell below that psychologically important level on Monday.

Sterling was down 0.17% at $1.1818. Britain's energy regulator later in the day will announce an eye-watering jump in a cap on energy prices, further boosting inflation in an already struggling British economy. Fuel price increases are passed on to British consumers through a price cap, calculated every three months.

This left the dollar index, which tracks the currency against its six main peers, at 108.53, on track for a 0.38% weekly gain and already up 2.5% in August.

Investors will eye Powell's speech at the Jackson Hole symposium at 1400 GMT for any insight into how aggressively the U.S. central bank still plans to raise interest rates.

Policymakers have in recent weeks emphasized how important it is for the Fed to get inflation under control.

Minneapolis Federal Reserve Bank President Neel Kashkari said on Tuesday his biggest fear is that the U.S. central bank misreads the extent and persistence of price pressures and will need to deliver even more aggressive rate hikes to curb inflation.

"The smoke signals (from the Fed) have been, as Kashkari indicated, 'if we have to err on the side of overtightening or not doing enough, we know what side we want to be on'," said Ray Attrill, head of FX strategy at National Australia Bank.

"I think there's an element of wanting to be seen to be talking tough in the hope that the tougher they talk, the less we have to do in terms of the policy."

Investors will also look to Powell to see whether his comments on the long-term outlook could prompt markets to unwind 2023 monetary easing bets, underpinning the dollar, Attrill added.

Markets are currently positioned https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html for U.S. rate hikes to peak this year and are pricing in rate cuts in 2023 on expectations policymakers will be more concerned about slowing growth than high inflation by then.

Elsewhere, the Australian dollar fell 0.35%, back below the psychological level of $0.7, but continued to gain against battered European currencies.

The Japanese yen drifted a touch weaker at 136.64 per dollar.

Reuters