Forex – Dollar Pares Gains as Fed Says Gradual Rate Hikes Appropriate

Investing.com – The dollar traded roughly flat against a basket of major currencies as the Federal Reserve‘s said gradual rate hikes remained appropriate.

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, rose 0.10% to 89.75

The Federal Reserve in its monetary policy report said the pace of wage gains was moderate, weighed by low productivity. The central bank also said a serious labour shortage would probably push up wages but did express some concern over high equity valuations.

“The economic expansion continues to be supported by steady job gains, rising household wealth, favorable consumer sentiment, strong economic growth abroad, and accommodative financial conditions,” the report said.

While the policy report did little to suggest a faster pace of rate hikes would be adopted by the central bank it added to narrative of an improving economy, reaffirming investor expectations for the Fed to raise rates next month. The monetary policy report comes ahead of Fed chair Jerome Powell’s testimony to Congress next week.

Also supporting the uptick in the greenback was euro weakness amid investor concerns over the outcome of the Italian election less than two weeks away.

Mizuho bank said the safe haven bid that started Thursday continued to support Treasuries and Bunds, as Italian election polls indicated the Five Star Movement is in the lead and a hung parliament looms.

EUR/USD fell 0.24% to $1.23.

Limiting the advance in the dollar, however, was a rise in the loonie after inflation topped economists’ forecasts.

Canadian inflationary pressures are “heating up,” CIBC said. While Friday’s inflation readings were somewhat stronger than expected, the bank said it would maintain its forecast for the Bank of Canada to remain patient in terms of rate hikes amid potential economic headwinds, including NAFTA renegotiations, US tax cuts and new mortgage rules.

GBP/USD rose 0.19% to $1.3981, recovering from a sharp fall in the European morning session amid a reported “fat finger” sell order.

USD/JPY fell 0.14% to Y106.61.