FOREX: Dollar takes breather from rally, Asian stock markets slipped

The dollar fell below a 16-month peak in early Asian trade on Thursday, as the US currency softened and lost ground on the pound and yen, while traders considered whether its recent surge was starting to run out of steam. 

Sterling was at $1.3491, having jumped 0.5% to a one-week high against the dollar on Wednesday, after a surge in Britain’s October inflation put pressure on the Bank of England to hike rates at its meeting next month. 

Against the Japanese currency, the dollar was still up at Wednesday’s 4-1/2-year high of 114.97, at 114.18 yen, and the euro was at $1.1316, near a 16-month low, with markets in the eurozone trading near the back of the Central bank rate-hike queue.

Strong US retail sales data earlier this week added fuel to the dollar’s recent rally, which followed a strong US inflation print last week on market bets that the Federal Reserve would have to raise rates in the middle of next year. 

The dollar index, which measures the currency against a basket of six rivals, rose from 93.872 on November 9 to 96.226 on Wednesday, a day ahead of inflation data, its highest since mid-July 2020. It was last at 95.798.

However, Luke Luyt, FX strategist at Pictet Wealth Management, said: “The stability of the current dollar strength over the next few months is far from certain.” 

“The Fed’s market expectations are beginning to be particularly bullish, suggesting a limited tailwind for the US dollar going forward by that factor.”

“Furthermore, the economic growth outlook may be more supportive of the euro as the worst slowdown in China’s economic activity looks mostly behind us, while COVID and energy import costs may prove less of an issue last winter.”

Others, however, saw the fall in the dollar as a buying opportunity. 

“The recent decline is hard to come by, but anything in the low of 95 looks like a buying opportunity,” analysts at Westpac said in a note.

Elsewhere, commodity currencies were hurt by oil prices, which fell to six-week lows. 

The Canadian dollar was at 1.2608 per US dollar, close to its six-week low a day earlier. Markets are expecting the Bank of Canada to start raising interest rates early next year.

The Australian dollar was at $0.7263, also at a six-week low.

Bitcoin was little changed around $60,500.