Dollar in doldrums amid Ukraine hopes, traders weigh Fed’s rate plans

The U.S. dollar headed for its first down week in six versus major peers on Friday, languishing near a one-week low, as investors continued to assess the impact of the start of the Federal Reserve’s rate tightening cycle this week.

The safe-haven greenback also lost traction – while the euro benefited – as traders stayed optimistic for an end to the war in Ukraine as talks continued between Moscow and Kyiv, although progress on Thursday was elusive.

Sentiment also improved after Russia avoided default on dollar-denominated debt.

A phone call between U.S. President Joe Biden and Chinese leader Xi Jinping later on Friday, with the U.S. warning China not to provide support to Russia, added a further layer of geopolitical risk.

Meanwhile, sterling ticked higher and remained on track for its first winning week in four, overcoming the hiccup from the Bank of England’s dovish comments after raising rates for a third consecutive meeting on Thursday.

The yen remained near a six-year low after the Bank of Japan left its ultra-accommodative policy settings unchanged on Friday, as widely expected, leaving it an outlier among developed-world central banks which are exiting pandemic emergency measures.

“For markets at least, peak concern over Ukraine appears to be behind, and the focus has shifted to the central banks,” said Shinichiro Kadota, senior FX strategist at Barclays (LON:BARC) in Tokyo.

“The dollar seems to be peaking with the market already pricing Fed hikes to a large extent, so the key going forward is going to be inflation: If it keeps surprising to the upside, then the question will be whether the Fed becomes even more hawkish,” which could give the dollar another leg up, Kadota said.

The dollar index paused for breath on Friday, recovering slightly to 98.049 after declining every other day this week, and set for a 1.08% loss over the period. It slipped to 97.724 on Thursday for the first time since March 10.

The dip came despite the Federal Open Market Committee raising rates on Wednesday and signalling the equivalent of a quarter-point increase at each of its six remaining policy meetings this year, leaving investors racing to work out how much monetary tightening the economy can handle.

“A well-worn market axiom, that says sell USD on the first Fed rate hike, is circulating with added momentum after USD’s failure to rally in the wake of this week’s indisputably hawkish FOMC,” TD Securities analysts noted in a research report.

Meanwhile, the continuation of peace talks even as fighting still rages in Ukraine has seen demand for safe havens like the dollar dry up, while the euro has rebounded from last week’s nearly two-year trough, on track for its first weekly gain since the start of last month.

The single currency was slightly weaker at $1.10835 on Friday, but up 1.62% for the week, its first winning week in six.

Sterling added 0.15% to $1.3166, putting it on track for a 0.97% weekly advance, despite the BoE softening its language around the need for future rate hikes to “might be appropriate” from “likely to be appropriate.”

The risk-sensitive Australian dollar rallied 0.38% to $0.7403, putting it on track for a 1.51% weekly advance. That would make it six winning weeks out of the past seven, after notching a 1.07% decline last week.

The dollar added 0.14% to 118.775 yen, putting it not far from the six-year peak of 119.13 reached Wednesday, and was on course for a 1.26% weekly gain, following a 2.31% jump the previous period, which was its best in two years.