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US Dollar Weakens as Fed's Dovishness Here to Stay

US Dollar Weakens as Fed’s Dovishness Here to Stay

Posted Tuesday, May 18, 2021 by
Aiswarya Gopan • 1 min read

The US dollar’s weakness is back in focus during early trading on Tuesday as it trades close to the lowest levels seen in several months against its key rivals with markets focusing on the Fed’s plans to extend its dovish view for longer. At the time of writing, the US dollar is trading at around 90.07.

The bearish moves followed soon after Dallas Fed President Robert Kaplan spoke about how he does not expect a rate hike at least until late 2022. He stuck to the same rhetoric markets have been hearing over the past few weeks that any rise in prices would be temporary, further reducing the likelihood of any action by the Fed sooner than anticipated. This weakened the US Treasury yields, which in turn reduced the appeal of holding the US dollar among investors.

On the other hand, expectations that other economies around the world could post rapid recoveries from the coronavirus crisis is supporting the risk sentiment in financial markets, sending commodity currencies and other leading currencies higher even as it keeps the safe haven status of the greenback under pressure. A surge in crude oil prices helped drive the CAD close to the highest levels seen in six years while the GBP is trading at a multi-month high.

However, the optimism remains limited as the coronavirus pandemic spreads across Asia and keeps the global economic outlook uncertain, and supports the US currency against leading Asian currencies. The safe haven currency, Japanese yen, is on the decline after Japan’s economy posted a contraction in Q1 2021.

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