The dollar clawed back from earlier losses on Monday as a hawkish Federal Reserve official laid out the case for further rate hikes, while the Australian dollar sank on concerns about unrest over COVID restrictions in China.
The greenback rebounded in early U.S. trading and added to gains after St. Louis Fed President James Bullard said that the U.S. central bank needs to raise interest rates quite a bit further and then hold them there throughout next year and into 2024 to gain control of inflation and bring it back down toward the Fed's 2% goal.
Comments from Fed Chair Jerome Powell on Wednesday will be watched for any new signals on further tightening with key U.S. jobs data for November also due on Friday. The U.S. central bank is expected to hike rates by an additional 50 basis points when it meets on Dec. 13-14.
"The markets have hit a bit of a plateau about what they're expecting. They know that the Fed's going to raise rates, and that's behind everything, but they're not sure how much or when," said Joseph Trevisani, senior analyst at FXStreet.com.
The dollar index has fallen to 106.67 from a 20-year high of 114.78 on Sept. 28 on expectations that its rally may have been overstretched and as the Fed looks to slow its pace of rate increases.
Some of the recent decline is also likely due to investors and traders booking profits before year-end, said Trevisani, noting that many trading firms curtail activity in December.
The dollar had dipped earlier on Monday despite other safe haven currencies the Japanese yen and the Swiss franc gaining on concerns about China.
Hundreds of demonstrators and police clashed in Shanghai on Sunday night as protests over China's stringent COVID restrictions flared for a third day and spread to several cities in the wake of a deadly fire in the country's far west.
Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said that the earlier decline in the dollar despite worsening risk appetite could reflect a shift in market sentiment towards the U.S. currency, but noted that it's too soon to be certain.
The greenback was last down 0.14% to 138.90 Japanese yen. The euro dipped 0.55% to $1.0338.
The risk sensitive Australian dollar, which is strongly tied to Chinese growth, was the worst performing major currency, last falling 1.48% to $0.6649. The currency was also dented by data showing that Australian retail sales suffered their first fall of 2022 in October as rising prices and higher interest rates finally seemed to have an impact on spending.
The offshore yuan weakened against the dollar to 7.2467.