Currencies

Dollar hits two-year low, fourth month of losses on Fed inflation mandate

U.S. dollar banknotes.
Liu Jie | Xinhua via Getty

The dollar hit a more than two-year low and a fourth straight month of losses on Monday in the wake of the U.S. Federal Reserve's policy shift on inflation.

Against a basket of currencies the dollar was down 0.15% at 92.097 in midday trading, having earlier hit its lowest since April 2018. It is down 1.24% for the month, marking its worst August in five years and the longest run of monthly losses since the summer of 2017.

The euro, which makes up the majority of the basket against which the dollar index is weighted, was up 0.35% at $1.195, having gained 1.45% in August, also its fourth straight month of increases.

Investors are adjusting to a speech last Thursday in which Federal Reserve Chair Jerome Powell outlined an accommodative policy change that is believed could result in inflation moving slightly higher and interest rates staying lower for longer.

"Even if U.S. central bankers are likely to be pleased about the interpretation of their measures, it is not good news for the dollar," Commerzbank analysts commented.

"If one expects the domestic purchasing power of the dollar to be eroded more quickly (as that is what inflation is) it is difficult to assume that it will maintain its purchasing power on the FX market in the long run," they argued.

Powell's remarks last week continued a trend lower in the dollar. The Fed's stimulus to offset the economic effects of the coronavirus pandemic has driven risk assets higher and hurt the safe-haven dollar.

"I think what we're seeing is the continuation of the momentum move lower in the dollar that began in Q2. The Fed message last week just reinforced that," said Daniel Katzive, head of FX strategy for North America, BNP Paribas.

The yen weakened by 0.48% to 105.84 per dollar on the view that Japan's next leader will stay the course on the 'Abenomics' economic revival program. The yen climbed to 104.195 on Friday after Shinzo Abe's resignation as prime minister for health reasons.

In recent weeks the yen has not strengthened proportionally to the weakening dollar.

"Dollar-yen remains a real sore thumb sticking out in the wrong direction. There's clearly some flow-based explanation, but I don't think we know exactly what's driving it. I do think that fundamentals will ultimately prevail and you will see a breakdown in that pair," said Katzive.