The dollar hovered just below a four-year peak against a basket of major currencies on Tuesday as the euro steadied near a 14-month trough with sellers taking a bit of a breather. The dollar index last traded at 84.671, having peaked at 84.861 on Monday, a high not seen since July 2010. It has posted 10 straight weeks of gains as markets wagered US rates would rise long before those in Europe or Japan.
The dollar's run even prompted New York Federal Reserve bank president William Dudley to caution that the gains could complicate the Fed's job, potentially hurting US economic performance and pushing down inflation. Dudley said on Monday that while the value of the dollar is not a policy goal of the Fed's, it had to be taken "on board" as part of the central bank's economic forecast.
Against the yen, the dollar eased 0.1 percent to 108.77 yen, down from a six-year high of 109.46 set on Friday. The Australian dollar got a slight boost after a private survey showed that activity in China's manufacturing sector unexpectedly picked up in September. The HSBC/Markit Flash China Purchasing Managers' Index (PMI) rose to 50.5 in September from August's final reading of 50.2. The survey, however, also showed that factory employment slumped to a 5-1/2 year low.
The Aussie dollar rose 0.2 percent to $0.8892, pulling away from Monday's seven-month low of $0.8851. Concerns about slowing Chinese growth and a big drop in the price of iron ore, Australia's top export earner, have added to pressure against the Australian dollar, which has slid 4.7 percent this month. Chinese steel and iron ore futures have fallen to record lows this week. "It hasn't really been led so much by what's happened domestically in Australia. I think it's been more about China, about commodity prices, and about a stronger US dollar," said Hamish Pepper, currency strategist for Barclays in Singapore, referring to the Aussie dollar's recent decline.
Analysts said market positioning may not help the Aussie dollar too much, at least judging by data from the US Commodity Futures Trading Commission, which shows that speculators held net long positions in the Aussie dollar as of the week ended September 16. "At the very least it suggests that perhaps positioning won't stand in the way of a further move lower," said Pepper at Barclays. On Tuesday, the euro held steady at $1.2853. The common currency has pulled up from Monday's fresh 14-month low of $1.2816, prompting some traders to suspect it might correct higher as key support near $1.2800 loomed.
But the bigger picture for a stronger greenback should remain intact thanks to the diverging interest rate views between the United States and its major counterparts including Europe and Japan. European Central Bank Governor Mario Draghi on Monday reiterated that the bank is ready to use additional unconventional tools if needed to spur growth. Still, there is a healthy dose of scepticism that the ECB would launch a bond-buying stimulus program any time soon.
"Draghi is more likely to be teasing the market than making any firm commitments. Any unconventional measures need to be 'within our mandate' and the Buba (Bundesbank) would doubtless argue that government bond buying was outside it," analysts at National Australia Bank wrote in a note to clients. "Still constructive ambiguity could suit Draghi at the moment as it puts downward pressure on the euro, which gives him some time to hope that deflationary forces ease."
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