Dollar subdued ahead of Powell testimony; Aussie slips

The index is down 0.6% for the month following a 2.6% gain in February.

SINGAPORE (Reuters) - The US dollar was tentative on Tuesday ahead of testimony by US Federal Reserve chair Jerome Powell, while the Aussie slid after the Reserve Bank of Australia raised its cash rate by 25 basis points but tempered hawkishness in its statement.

The Australian dollar eased to a more than two-month low of $0.6690 and was last down 0.33% at $0.6712 after the central bank raised its cash rate to the highest in more than a decade at 3.60%, as expected.

The RBA changed a reference to further rate “increases”, saying instead that “further tightening” would be needed, suggesting that the central bank might be nearing the end of its cycle of increases.

“An initial glance at RBA’s statement suggests they are nearing the end of the tightening cycle, and perhaps one step closer to publicly discussing a pause,” said Matt Simpson, senior market analyst at City Index.

Meanwhile, the US dollar index, which measures it against six major rivals, fell 0.077% to 104.170, having slipped 0.26% overnight.

The index is down 0.6% for the month following a 2.6% gain in February.

The euro was up 0.11% to $1.069, extending its nearly 0.5% rise overnight. Sterling was last trading at $1.2044, up 0.19% on the day, while the kiwi rose 0.27% to $0.621.

The Japanese yen was mostly flat at 135.94 to the dollar ahead of the final policy meeting for Bank of Japan Governor Haruhiko Kuroda on Thursday and Friday.

Investor attention will firmly be on Powell’s testimony before Congress on Tuesday and Wednesday, with the February jobs report due on Friday also keenly awaited. 

Kevin Cummins, chief economist at NatWest Markets, said Powell would likely express heightened concern about inflation but would probably stop short of raising expectations for a 50 basis point rate increase on March 22.

After delivering significant rises last year, the Fed raised interest rates by 25 basis points at its past two meetings, but resilient economic data throughout February stoked fears of the central bank going back to bigger steps.

“We suspect he will sound noncommittal for now and take his cues from the looming upcoming key data,” said Cummins, who expects the Fed to raise interest rates by 50 basis points.

Fed funds futures traders are pricing in a 76% probability the Fed will raise rates by 25 basis points at its March meeting. They also expect interest rates to peak at 5.48% in September and still be above 5% at the end of the year.

“What has become clear to financial markets is that inflation is proving far stickier than most had felt at the start of the year,” ING economists said.

“A return to the disinflation and weaker dollar narrative will have to wait.”