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Dollar sinks as Powell eases policy concerns; here comes the CPI test

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News Tech: The dollar fell to its weakest since mid-November against its major peers on Wednesday, after Federal Reserve Chairman Jerome Powell said it could take months to make a decision on whether to make a decision. $9 trillion drop in the central bank’s balance sheet. Testifying at his waiver hearing on Tuesday, Powell said the US economy is ready for higher interest rates and a small reduction in holdings – known as quantitative tightening (QT) – against inflation. Still, he said, policymakers are still debating methods of shrinking the Fed’s balance sheet, and it sometimes takes them two, three, or four meetings to make such a decision.

“Risk is carrying,” he said, weighing on both the dollar and the safe-haven yen. The dollar index, which measures the greenback against six major currencies, fell to 95.543 during the Asian session, its lowest since Nov. US consumer inflation data will be released later in the global day, with headline CPI expected to hit 7% year-on-year, reinforcing the case for a quick rate hike. Money markets are currently pricing in about an 85% chance of a rate hike in March and a total of at least three quarter-point hikes by the end of the year.

Powell’s comments were less flamboyant than some of his peers, alleviating market concerns about a sudden withdrawal of monetary support. For example, Atlanta Fed President Raphael Bostic said Monday that high inflation and a strong recovery warrant a rapid reduction in the Fed’s holdings. “While Powell hasn’t really pushed market prices back around the expected Fed rate hike, we’ve certainly seen relief happen across all markets” after “trying to quell confidence” that they are stuck on a definite trajectory,” Chris Weston, head of research at brokerage Pepperstone, wrote in a note to clients.

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“We believe the market reaction function is asymmetric,” TD Securities strategists wrote in a note. “That is, with a well-valued hawkish Fed, a weaker CPI could detract from the tactical value of the USD and support risks.” The Australian dollar, often seen as a liquidity indicator of risk appetite, hit a nearly one-week high at $0.72195. The British pound hit $1.3645 for the first time since Nov. 4. The euro trades near the top of a two-month range at $1.13755. A rise above $1.1387 would take it to the highest level since mid-November.

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