Dollar dips as Powell testimony disappoints hawks

© Reuters. FILE PHOTO: U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration//File Photo

By Saqib Iqbal Ahmed

NEW YORK (Reuters) -The U.S. dollar fell against a basket of currencies on Wednesday after Federal Reserve Chair Jerome Powell's comments on the central bank's ongoing fight to lower inflation failed to live up to the more hawkish market expectations.

Powell told lawmakers the fight against inflation still "has a long way to go" and that despite a recent pause in interest rate hikes officials agreed borrowing costs would likely need to move higher.

While noting that inflation remains very far from the Fed's target, Powell said it may make sense to still raise rates, at a more moderate pace.

"Looks as if Powell failed to out-hawk markets that were braced for a more explicit ratification of the median projection in the latest dot plot summary of economic projections," said Karl Schamotta, chief market strategist at business payments company Corpay.

The Fed had left interest rates unchanged at its June meeting but signalled in new projections that borrowing costs may still need to rise as much as half of a percentage point by the end of this year.

"By sticking to the balanced, data-dependent language deployed in last week's press conference, he left investors betting that the ongoing deceleration in growth and inflation will translate into one - not two - rate hikes by year end," Schamotta said.

The dollar index, which measures the currency against six rivals, fell 0.43% to 102.07 following Powell's testimony to the House Financial Affairs Committee.

The hearing, the first of two Capitol Hill appearances this week, is part of his twice-yearly reports to federal lawmakers.

"Consumer Price Index and Non-Farm Payrolls in July are going to be huge events, though it does feel that unless there's some kind of disastrous jobs print they're going to hike in July come what may," TraderX market strategist Michael Brown said.

Investors broadly expect rate hikes to resume at the Fed's July meeting, though financial market indicators reflect doubts that the Fed will deliver more increases beyond that.

YEN UNDER PRESSURE, STERLING SEESAWS

The euro was 0.62% higher against the dollar at $1.0985. The dollar was up 0.3% at 141.805 yen, with the Japanese currency under pressure after Bank of Japan Governor Kazuo Ueda on Wednesday reiterated the central bank's dovish stance to maintain its ultra-loose monetary policy.

The British pound oscillated between gains and losses after data showed UK inflation accelerated more than expected in May.

The annual pace of British consumer price gains was steady at 8.7% in May, against hopes it had cooled since April, with the UK inflation rate remaining more persistent compared with other major economies.

The pound was last up 0.09% at $1.2774, after slipping to a near one-week low of $1.2691 earlier in the session.

The Australian dollar was up 0.15% at $0.67975, on pace to snap a three-day losing streak. The currency has weakened this week following Tuesday's release of the minutes of the Reserve Bank of Australia's June policy meeting, which lacked guidance on further rate hikes. Markets took this as a dovish sign.

The Aussie, which is sensitive to Chinese economic data, has also come under pressure due to lacklustre stimulus measures from Beijing.

Bitcoin extended overnight gains to breach $29,000 for the first time since late May, helped by the launch of a new crypto exchange backed by Fidelity, Citadel Securities and Charles Schwab (NYSE:SCHW). It was last up 6.47% at $30,148.