Dollar dumped, bonds buoyant on Fed inflation caution

SYDNEY: The dollar was on the defensive yesterday after suffering its worst drubbing in five months while bonds celebrated a comeback on speculation the Federal Reserve might not tighten US policy as aggressively as previously thought.

Moves in Asian share markets were mostly minor with Japanese markets closed for a holiday and the United States off for Thanksgiving.

Spreadbetters pointed to a slightly easier opening for the major European bourses.

MSCI’s broadest index of AsiaPacific shares outside Japan eked out a fresh 10-year peak with a rise of 0.15 per cent, as did Hong Kong’s main index.

The dollar’s rout came after minutes of the Fed’s last meeting showed ‘many participants’ were concerned inflation would stay below the bank’s 2 per cent target for longer than expected.

That echoed comments from Fed Chair Janet Yellen that she was uncertain about the outlook for inflation and led markets to pare back pricing for more hikes next year.

While a move in December to between 1.25 and 1.5 per cent is still almost fully priced in, Fed fund futures rallied to show rates at just 1.75 per cent by the end of next year.

“The US dollar was already staggering into Thanksgiving when the FOMC minutes gave it another shove,” said Sean Callow, a senior currency analyst at Westpac.

“The FOMC seems to be increasingly uneasy about “ongoing softness” in inflation.” “Investors can be forgiven for wondering why they should buy more US dollars if we are heading into a “Powell pause” in the first half of 2018,” he added, referring to newly appointed Fed Chair Jerome Powell.

Against a basket of currencies, the dollar was huddled at 93.184, having shed 0.75 per cent overnight.

The euro was enjoying the view at US$ 1.1834 after climbing from US$ 1.1731 on Wednesday.

The dollar also crumbled to 111.27 yen, near its lowest since Sept 20.

The overnight move was the largest single- day fall against the yen since May.

The Fed’s dovish turn helped break the inexorable sell off in short-term US Treasuries, with yields on the two-year note falling almost five basis points to 1.727 per cent. — Reuters