The dollar was on the defensive on Tuesday on expectations that the Federal Reserve will keep its easy policy stance and on sharpened appetite for risk following Beijing's announcement of sweeping reforms. But optimistic comments on the US economy by Fed officials slightly dented the prevailing expectations on Fed policy, limiting losses for the dollar.
The dollar index stood at 80.664, not far from Monday's low of 80.565. A break above Monday's high of 80.923 is needed to halt its downtrend in the past week. The dollar has been under pressure from expectations that Janet Yellen, the Federal Reserve's chief in waiting, is likely to pursue an accommodative policy to support job growth.
The main focus is how long she intends for the Fed to keep buying $85 billion of bonds every month, with many investors expecting the tapering of that programme to start in March rather than December. Slightly denting that view, top Federal Reserve officials from opposite sides of the policy spectrum pointed on Monday to improvements in the US economy.
William Dudley, president of the Federal Reserve Bank of New York and one of the staunchest supporters of the Fed's easy-money policies, cited labour market improvements and stronger-than-expected growth in the third quarter as signs of optimism for the US economic recovery.
"Comments from Fed officials yesterday sounded a bit hawkish. To assess where the consensus is at the Fed, the Fed's policy minutes tomorrow will be important," said Shinichiro Kadota, chief FX strategist at Barclays. Dudley's comments helped drive down US and Japanese share prices, producing a knee-jerk buying in the safe-haven yen. The dollar fell 0.3 percent to 99.70 yen, with levels around 99.60 yen seen as immediate support. But many traders regard the latest setback in the dollar as a correction rather than a reversal in the dollar's uptrend against the Japanese currency.
The euro was supported at $1.3503, after having hit a 12-day high of $1.3542 on Monday, extending its recovery after a sharp drop to two-month low of $1.3295 on November 7 in the wake of the European Central Bank's surprise rate cut earlier this month. The euro and other risk currencies also benefited from a global rally in shares reflecting optimism for China's reform plans, which boosted China's CSI300 Index 3.3 percent on Monday, its biggest one-day rise in two months. On top of the Fed minutes, the market is also looking to US retail sales and consumer inflation data, which are also due on Wednesday.