Dollar swoons as Powell soothes policy fears; CPI test looms

The dollar slid to its weakest since mid-November against major peers on Wednesday, after Federal Reserve Chair Jerome Powell said it may take several months to make a decision on running down the central bank’s $9 trillion balance sheet.

In testimony at his renomination hearing on Tuesday, Powell said the U.S. economy was ready for higher interest rates and a runoff of its asset holdings — dubbed quantitative tightening (QT) — to combat inflation. But he said policymakers were still debating approaches to reducing the Fed’s balance sheet, and that it could sometimes take two, three or four meetings for them to make such decisions.

Powell’s comments were less hawkish than those of some of his colleagues, allaying market fears for a sudden withdrawal of monetary support, Reuters reported.

Atlanta Fed President Raphael Bostic, for example, said on Monday that high inflation and a strong recovery warrant a rapid rundown of Fed asset holdings.

The dollar index, which measures the greenback against six major peers, dipped to 95.543 in the Asian session, the lowest since Nov. 18.

U.S. consumer inflation data is due later in the global day, with headline CPI seen coming in at a red-hot 7% on a year-on-year basis, boosting the case for an early increase in rates.

Money markets currently price about 85% odds of a rates lift-off by March, and a total of at least three quarter-point hikes by year-end.

The Australian dollar, often considered a liquid proxy for risk appetite, touched its highest in almost a week at $0.72195.

Sterling rose to $1.3645 for the first time since Nov. 4.

The euro traded near the top of its range of the past two months at $1.13755. A climb above $1.1387 would take it to its highest since mid-November.