Dollar Edges Lower; Remains Elevated with High Energy Prices

The dollar edged lower Thursday as a compromise over the U.S. debt ceiling appeared likely, but the world’s safe haven remained near recent highs as sky-high energy prices added to worries that elevated inflation levels will pressure the Federal Reserve to quickly tighten its monetary policy.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 94.148, just below the 94.504 level seen last week, its highest level since September 2020.

USD/JPY traded largely flat at 111.38, EUR/USD traded 0.1% higher at 1.1566, still close to a 14-month low, GBP/USD rose 0.1% to 1.3599, while the risk sensitive AUD/USD rose 0.3% to 0.7296.

The news that U.S. Senate Republican Leader Mitch McConnell has offered to allow an extension of the federal debt ceiling into December, a move that would head off a historic default with the likely associated financial crisis and recession, has taken the edge off the dollar’s appeal Thursday, This is because the U.S. currency is often seen as a safe haven in times of stress.

That said, the dollar remains near recent highs on worries that the surge in energy prices will fuel inflation, prompting the Federal Reserve to withdraw its extremely accommodative monetary policy sooner than expected.

“How central banks respond to this energy price spike will be a key driver of FX rates over coming months,” said ING analysts, in a note.

The Fed is widely expected to begin tapering its bond-buying program in November, with the question being how far high energy prices are acting as a brake on a economic growth.

The latest release of ADP private payrolls seemed to answer that question, with U.S. companies adding more jobs than forecast in September. Companies’ payrolls increased by 568,000 last month, the most since June, above a revised 340,000 gain in August, and well above the expected 428,000 rise.

This puts the focus squarely on the weekly jobless claims due later Thursday, but, more importantly, Friday’s official employment report, with nonfarm payrolls seen rising by 488,000 jobs, up from 235,000 jobs added the previous month.

“We think a bullish cocktail is being mixed for the dollar,” said ING. “Add in any strong employment data and market expectations may swing towards Fed projections of a steepish three year tightening cycle starting next year.”