Dollar rests after surging on Powell's reappointment

November 24, 2021: The dollar paused on Wednesday after a surge that followed the reappointment of Federal Reserve chair Jerome Powell, who was seen as the more hawkish choice, while the New Zealand dollar eased after a smaller than expected rate hike.

The euro held just above a 16-month trough at $1.1238, having found a measure of support from stronger-than-expected European business surveys. The yen sat just above a four-year low at 115.13 to the dollar.

The kiwi was the biggest mover in an otherwise quiet Asian session and fell as far as 0.5% to $0.6915 after the Reserve Bank of New Zealand lifted rates 25 basis points (bps) and raised its long-term cash rate projection by 50 bps.

Traders had been looking for more on both counts and interest rate swaps reversed sharply after the decision, with benchmark two-year swaps down 17 bps.

Westpac strategist Imre Speizer said the unwind of aggressive expectations might be a blueprint for other markets that have become similarly positioned, but in the meantime, he reckoned the kiwi could be on the ropes against a rising dollar.

"If it fell below $0.69 I think we're in danger of going below $0.68," he said.

The dollar has zoomed to its highest levels of the year as better-than-expected U.S. economic data drive bets the Federal Reserve will hike rates to tame inflation. Markets also seem convinced Powell is more likely to respond sooner and harder to inflation than Lael Brainard - the other contender for his job, who has been nominated as vice-chair.

A slew of U.S. data, including jobless claims, growth, and the Fed's preferred inflation measure, is due later on Wednesday ahead of the Thanksgiving holiday on Thursday.

The greenback had scaled a more-than-four-year high of 115.19 yen on Tuesday as two-year Treasury yields surged to their highest levels since March 2020 and Fed funds futures priced a chance of three rate hikes next year.

In emerging markets, the Turkish lira has collapsed and fell more than 11% in one session overnight, setting the scene for further capital outflows and possibly putting pressure on EM currencies globally.

The U.S. dollar index traded flat at 96.533 after hitting a 2021 high of 96.612 on Tuesday. It is trading miles above 50-day and 200-day moving averages.

Sterling touched an 11-month low of $1.3344 against the rising dollar on Tuesday and steadied at $1.3380 on Wednesday. The risk-sensitive Australian dollar hovered at $0.7255 after falling to a seven-week low of $0.7207 overnight.

Reuters