Dollar gains, Aussie slides after RBA hikes but tempers hawkish view

Dollar gains, Aussie slides after RBA hikes but tempers hawkish view

SINGAPORE/LONDON (Reuters) – The dollar advanced on Tuesday as last week’s rally in riskier currencies took a breather, while the Aussie dollar slid after the Reserve Bank of Australia raised rates but tweaked its outlook, spurring expectations that hikes are at an end.

The RBA raised interest rates by 25 basis points on Tuesday to combat stubborn inflation, as expected, but markets seized on a tweak to the language in the central bank’s statement, and concluded further tightening was unlikely.

The Australian dollar sank as much as 1.06% to a low of $0.642 and was last at $0.6434. The currency was on course for its biggest one-day percentage decline in a month.

Commonwealth Bank of Australia (OTC:CMWAY)’s currency strategist Carol Kong said RBA’s forward guidance was slightly watered down, which was perceived as dovish, resulting in the Aussie quickly giving back its gains after an initial knee-jerk rally.

The Aussie had been among the beneficiaries of last week’s weakening dollar and touched a three-month peak on Monday after U.S. data from Friday showed job growth slowed in October.

That led markets to price in rate cuts by the middle of next year, building on a move lower in U.S. Treasury yields, and lifting risk appetite.

“With the RBA out of the way, the major determinants of AUD/USD will shift back to global. Expect focus to move back to Fed rhetoric and the resultant impacts on U.S. Treasuries,” Kong said.

The rally in bonds and equities last week looks to be fading, with yields higher at the start of the week and the market focus switching to U.S. Fed officials’ comments this week.[US/]

Federal Reserve Bank of Minneapolis President Neel Kashkari said on Monday the U.S. central bank likely has more work ahead of it to control inflation.

Fed Chairman Jerome Powell is due to speak on Wednesday and Thursday, when the focal point will be whether he maintains the more dovish tone struck after the Fed’s policy meeting last week.

Against a basket of currencies, the dollar index rose 0.1% to 105.38, after climbing 0.2% on Monday, but remained not far from a nearly two-month low of 104.84 touched on Monday.

The index fell 1.3% last week, its steepest decline since mid-July, a sharp reversal after a recent run higher.

“If you look at the percentage of currencies that have been down versus the dollar over the last 26 weeks, it was approaching 100%, and data also showed very long dollar positioning … so we got a reversal of some of those positions triggered by the jobs report,” said Chester Ntonifor, foreign exchange strategist at BCA Research.

Where markets go from here “will have to depend on the incoming data.”

The euro was down 0.15% at $1.070, easing away from its eight-week peak of $1.0756 hit on Monday. Sterling was last at $1.2327, down 0.1% on the day and just shy of the seven-week high of $1.2428 it hit on Monday.

The Japanese yen was at 150.28 per dollar, back on the weak side of the 150-level that has kept traders on edge in recent weeks as they look for signs of intervention from Tokyo.

The yen softened to 151.74 per dollar last week, edging closer to October 2022 lows that spurred several rounds of dollar-selling intervention.

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