US dollar slips as equity market mood lifts

London

THE US dollar slipped on Monday against its major peers as a wave of M&A deals lifted the mood in global equity markets and investors looked ahead to an event-packed week which includes a Fed meeting and the appointment of a new Japanese premier.

The UK parliament was preparing to debate a draft bill which the government has admitted breaches the terms of its EU divorce treat. The currency nevertheless firmed 0.6 per cent versus the US dollar following its weakest week since March.

The gain was partly down to the US dollar index, which slipped 0.2 per cent after firming for two weeks straight.

This week's US Federal Reserve meeting will be its first since chairman Jerome Powell unveiled a policy shift towards greater tolerance of inflation, effectively pledging to keep interest rates low for longer.

"There will be pressure on the Fed to back up the new policy goals with some action," said MUFG strategist Lee Hardman, noting that inflation remained well below target.

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"Expectations are they could strengthen forward guidance, possibly by saying rates will be on hold for 3-4 years," said Mr Hardman, who remains bearish on the greenback.

ING Bank said in a note to clients that the "soft" Fed policy looks largely priced in following Mr Powell's unveiling of the new inflation targeting approach, and that more positive news would be needed to push cyclical currencies higher and the US dollar lower.

"With fragile equity markets and risk sentiment, it is unlikely to happen this week, in our view," the bank said.

"This suggests a range-bound dollar index this week." Speculators trimmed net short US dollar positions for the second straight week to US$32.67 billion, according to Reuters calculations and Commodity Futures Trading Commission data.

That's off nine-year highs of US$33.68 billion in late August Analysts at Standard Chartered said there was a risk the Fed would disappoint US dollar bears.

"Having set aside yield curve control as a near-term policy option, the FOMC does not seem to have an operational consensus on how to use the balance sheet," they told clients. "This may disappoint investors." The data showed net euro longs inched higher but remained off record highs touched a few weeks ago.

The single currency had spiked to a one-week high above US$1.191 after Thursday's European Central Bank meeting, before easing back as policymakers talked it down the next day.

It was trading around US$1.187 on Monday. REUTERS