U.S. dollar holds tight as investors look beyond Fed to next big central bank meetings

The dollar paused for breath on Thursday, having given up a brief rally made after the U.S Federal Reserve said it would end pandemic-era bond purchases in March, as investors awaited imminent decisions from other major central banks.

Investors are now sitting tight ahead of meetings from the European Central Bank, the Bank of England, and others before firming up their positions at the end of a busy week for central banks.

The dollar index, which measures the currency against six peers, was last at 96.391, having tested last month’s 16-month high of 96.938 after the Fed’s announcement before retreating to as low as 96.296.

On the other side of the dollar sell-off, the euro advanced 0.25% on Wednesday, the pound gained 0.27% and the risk-friendly Australian dollar jumped 1%.

“It suggests to me that markets were positioned for the Fed being more hawkish than survey expectations would have you believe,” said Ray Atrill head of FX strategy at NAB. “Also that risk assets took the latest pivot so well reinforces the fact that the U.S. dollar and risk sentiment seem to be negatively correlated.”

All three main U.S. stock indexes reversed earlier losses and climbed into positive territory after the meeting, extending gains as Fed Chair Jerome Powell struck an upbeat tone in a news conference and expressed willingness to raise interest rates as necessary to control inflation.

“The economy no longer needs increasing amounts of policy support,” said Powell, contrasting the near-depression conditions at the onset of the coronavirus pandemic in 2020 with today’s rising prices and wages and rapid improvement in the job market.

But the Fed was not the only game in town. The ECB, BOE, as well as the Swiss National Bank and Norges Bank will hold policy meetings later Thursday.

“To some extent the reaction to the Fed might have to wait for what the ECB does, because we’re expecting the contrast between the ECB’s disposition and the Fed’s will be laid bare later tonight and that could probably be a catalyst for the U.S. dollar to push through the highs overnight,” Atrill added.

ECB officials are set to call time on the central bank’s Pandemic Emergency Purchase Program but investors will look to see how the six-year old Asset Purchase Program may pick up the slack, though rate rises are a way away.

The euro was last at $1.1282.

The Aussie dollar edged higher to $0.7177 after jobs data came in well above expectations, seemingly more significant for markets than Australia’s top central banker saying he thought it unlikely interest rates will need to rise in 2022.

The pound rested at $1.1326 ahead of a meeting in which the BOE is trying to both hose down inflation and address concerns about an economy already worried about the looming fast-spreading omicron variant of Covid-19.

Data on Wednesday showed UK inflation surged to 5.1% in November, its highest in more than 10 years, the same day the country recorded its highest daily coronavirus cases since the start of the pandemic.

Bitcoin also rallied on Wednesday to $49,000.

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