Dollar Edges Higher; Dovish Powell Limits Gains

© Reuters.
© Reuters.

By Peter Nurse – The dollar edged higher Friday after President-elect Joe Biden outlined his plans for additional stimulus, but gains are likely to be limited after Federal Reserve Chairman Jerome Powell declined to join any discussion about reducing monetary stimulus. 

At 4 AM ET (0800 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 90.267, rebounding from last week’s near three-year low. was down 0.1% at 103.67, while the risk-sensitive was down 0.3% at 0.7753.

Biden released details of his $1.9 trillion spending plan overnight, including more direct payments to households, an expansion of jobless benefits and an enlargement of vaccinations and virus-testing programs.

The proposal has been expected ever since the Democrats won control of the Senate in early January, but questions over how his administration plans to foot the bill has driven Treasury yields higher, supporting the greenback.

Still, gains are limited after Fed Chair Jerome Powell adopted a very dovish tone in a live-streamed interview on Thursday, although he didn’t explicitly rule out a tapering of bond purchases toward year-end. The Fed doesn’t expect to raise interest rates until 2023 at the earliest.

“Now is not the time to be talking about exit” from the central bank’s easy monetary policies, he said, adding “the economy is far from our goals.”

Last Friday’s jobs report showed the U.S. lost 140,000 positions in December, while the December CPI annual figure advanced 1.4%, still below the 1.7% average over the last 10 years.

The Fed’s low interest rate policy and asset-buying program have weighed heavily on the dollar.

There’s an abundance of U.S. economic data to digest later Friday, including December , and i.

Elsewhere, fell 0.2% to 1.3665 after showed Britain’s economy shrank by 2.6% in November, the first monthly fall in output since April and the country’s initial Covid lockdown. The economy is now 8.5% smaller than it was before the start of the coronavirus pandemic in February.

fell 0.1% to 1.2140, only marginally dipping despite the political turmoil in Italy, the euro-zone’s third largest economy, with the ruling administration under pressure after a small party within the coalition withdrawing its support.

The spillover into the foreign exchange market should be limited, said analysts at ING, in a research note, given “we see limited risk of a material widening in the BTP-Bund spread which is set to benefit from the European Central Bank’s heavy purchases.”

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