Dollar heads for weekly loss as traders shrug off taper talk

The dollar was pinned near milestone lows on Friday, and headed for a weekly loss, as traders' initial concerns at taper talk in Federal Reserve minutes ebbed - with actual tapering seeming distant - while pandemic recovery boosted other currencies.

On Wednesday, minutes from the April Fed meeting noted some committee members think that if the economy keeps improving, it might be appropriate, at upcoming meetings, to “begin discussing a plan for adjusting the pace of asset purchases”.

But after bouncing off a four-month low on the euro as the mere mention of tapering policy prompted fears of early rate rises, the dollar has dropped back and, at $1.2225 per euro, is again testing major support around $1.2345.

The dollar index is at 89.795, just a fraction above a three-month low of 89.686 struck before the Fed minutes were published. The index, which measures the greenback against six major currencies, is down about 0.6% for the week so far.

Against the yen the dollar was steady in Asia on Friday at 108.84, having dropped about 0.5% on the week. Cryptocurrencies have also staged a comeback, with bitcoin at $41,171 sitting some 37% above Wednesday's low.

“It has been just over 24 hours since markets got spooked by the prospect of the U.S. Fed tapering its asset purchases, but having proverbially slept on it, the mood seems less sour today,” ANZ analysts said in a note. “Which seems reasonable – it's not like the Fed is on the brink of wanting to actually act.”

A future discussion on tapering is also already reflected in the pricing of U.S. Treasuries and in money markets after the heavy selling of government bonds through February and March, limiting further dollar gains from the Fed minutes.

Benchmark 10-year Treasury yields fell to 1.6340% overnight and have range-traded between roughly 1.5% and 1.7% for two months, after jumping by more than 80 basis points in the first quarter of 2021. Fed Funds futures price the first full rate hike by January 2023.

“The world was, is and will remain awash with cheap dollars,” said Societe Generale (OTC:SCGLY) strategist Kit Juckes.

“As long as the Fed is talking about talking about tapering, Treasuries are likely to remain stuck in their range and the dollar's path of least resistance is to go on falling, albeit slowly.”

Elsewhere among major currencies, moves were slight as traders awaited retail sales data in Australia and Purchasing Managers' Index figures across Europe.

The Australian and New Zealand dollars, which are near multi-year highs as lofty commodity prices and strong pandemic recoveries provide support, looked to close the week broadly steady.

The kiwi last bought $0.7198 and the Aussie $0.7773. [AUD/]

Sterling is perched close to its highest since 2018 as high vaccination rates support a stronger-than-expected economic recovery.