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FOREX-Dollar hits two-week high in wake of rates talk
Published at 05/05/2021 at 12:08

* Graphic: World FX rates

By Ritvik Carvalho

LONDON, May 5 (Reuters) - The dollar hit its highest in over two weeks on Wednesday, extending a rally as chatter about the possibility of higher U.S. interest rates and a sell-off in tech stocks soured risk sentiment to the benefit of the safe-haven currency.

The dollar's bounce on Tuesday put pressure on the euro, which dropped once again below the $1.20 mark on Wednesday, hitting its lowest against the buck in over two weeks.

The dollar index, which measures the greenback against a basket of peer currencies, rose as high as 91.436, its highest since April 19.

The bounce was partly sparked by comments from U.S. Treasury Secretary Janet Yellen that rate hikes may be needed to stop the economy overheating.

Yellen later downplayed their importance, but even the slightest mention of U.S. tightening has an outsized impact in markets that have become so dependent on monetary stimulus.

The effect was apparent in large-cap tech stocks, which suffered hefty losses overnight, dragging the Nasdaq down 1.88%.

"The markets may be tempted to do some ‘yellen and screaming’ after last night’s episode, following the apparent hawkish comments by the U.S. Treasury secretary and the subsequent backtracking," said Valentin Marinov, head of G10 FX research at Credit Agricole.

"All that said, the comments do highlight that there is now an ongoing debate among the U.S. officials about the need to curb the Fed’s ultra-aggressive monetary stimulus."

So far, Federal Reserve Chair Jerome Powell has argued the labour market is still far short of where it needs to be to start talking of tapering asset buying.

That position could be tested on Friday should the April payrolls report be as strong as some are suggesting. The median forecast is for a rise of 978,000, but estimates stretch as high as 2.1 million.

Three more Fed officials are speaking later on Wednesday providing the opportunity for further market-moving comments.

On the data calendar, traders will look to the ADP payroll numbers that precedes Friday's jobs numbers, and the ISM services index for April, both due later in the U.S. trading session.

"Two strong releases may cast further doubt on the ability of the Fed to hang on to its dovishness and could help the dollar stay supported today," said Francesco Pesole, G10 FX strategist at ING in a note.

"Low-yielders may be the main underperformer if the dollar inches higher, while activity currencies may still benefit from the supported reflationary story and some evidence of vaccination rollout gathering more pace in key regions of the world."

Trading was limited in Asia with Japan and China on holiday, but the New Zealand dollar blipped over half a percent higher to $0.7192 on the back of stronger than expected jobs data. The Australian dollar also ticked higher, up 0.3% to $0.7736.

The U.S. dollar last traded flat to the yen at 109.29 and again needs to break resistance at 109.61 to encourage more speculative bids.

Sterling traded 0.24% higher at $1.3918 a day ahead of the Bank of England meeting, where it is expected by some to announce a tapering of its bond-buying programme.

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(Reporting by Ritvik Carvalho; additional reporting by Wayne Cole in Sydney and Vidya Ranganathan in Singapore. Editing by Mark Potter, William Maclean)

((Ritvik.Carvalho@thomsonreuters.com; +44 2075429406; Reuters Messaging: ritvik.carvalho.thomsonreuters@reuters.net; Twitter @ritvikcarvalho))