The boom in the commodity sector, which has spread to commodity currencies, leaves the dollar under pressure. The reasons for this boom: the Fed’s promise to maintain an ultra-soft monetary policy and hopes for faster global growth. No one worries right now that the rise in raw materials will cause a global spike in inflation and an increase in interest rates.
The safe-haven US dollar fell to three-year lows versus riskier currencies on Thursday as confirmation of dovish signals from the Federal Reserve spurred reflation rates.
The US dollar fell to new lows against the Australian and Canadian dollars and held around the lows set the day before against the British and New Zealand currencies.
Fed Chairman Jerome Powell reiterated Wednesday that the central bank will not adjust policy until the economy shows clear signs of improvement and will monitor any short-term spike in inflation. His speech at the House Financial Services Committee echoed his speech in the Senate the day before.
“Powell has made it very clear that the economic improvement we see so far will not force the Fed to tighten monetary policy,” National Australia Bank currency strategist Rodrigo Catril wrote in a note to clients.
“The punch bowl is not going anywhere in the near future, and the monetary and political background should support risky assets for some time.”
Affordable financial conditions, the promise of fiscal stimulus, and the accelerated introduction of the COVID-19 vaccine have led people to invest in what is known as the reflation trade, with bets on growth in economic activity and prices.
Commodity-pegged currencies could benefit from rising global trade, while investors also welcomed the UK’s progress in recovering from the coronavirus pandemic.
“The dollar is likely to weaken over time as the economy picks up and the focus on reflationary trade increases,” said Bart Wakabayashi, manager of the Tokyo branch of State Street Bank and Trust.
“We are seeing very strong upward pressure, in particular on US prices.”
The Australian dollar traded at $ 0.79672 after hitting a fresh three-year high of $ 0.7978 earlier.
The Canadian dollar hit a three-year high of 1.2502 Canadian dollars per US dollar.
The New Zealand currency is trading at $ 0.7434, near Wednesday’s high of $ 0.7455.
Sterling rose 0.1% to $ 1.4161 after hitting a $ 1.43 threshold yesterday for the first time since April 2018.
The euro traded near the top of its recent range at $ 1.2178, close to a near-monthly high of $ 1.2180 reached earlier this week.
Nonetheless, the dollar strengthened against other traditional safe-haven currencies, maintaining two-day gains to 105.875 yen and holding near a three-month high of 90.945 Swiss francs hit the day before.