Dollar awaits Powell's remarks as hawks urge early taper

TOKYO (Reuters) – The dollar paused on Friday as investors awaited a highly-anticipated speech by Federal Reserve Chair Jerome Powell later in the day, following small gains the previous day after fresh calls for early tapering from a few hawkish Fed policymakers.

FILE PHOTO: A U.S. dollar banknote is seen in this illustration taken May 26, 2020. REUTERS/Dado Ruvic/Illustration

A dovish tone from the Fed’s chief could counter worries about economic damage from the Delta coronavirus variant and fears about political fallout from a bomb attack in Kabul, possibly spurring bids in riskier currencies against the dollar.

The dollar index stood at 93.030, bouncing back from Thursday’s low of 92.807 as the euro traded at $1.1755, having eased from the previous day’s high of $1.1779.

Sterling ticked down to $1.3695 . Against the safe-haven yen, the dollar eased slightly to 109.98 yen.

Dallas Federal Reserve President Robert Kaplan suggested he expects the Fed to start raising interest rates next year, a comment that analysts took as more hawkish than last week when he appeared nervous about the potential impact of the Delta variant’s spread on the economic recovery.

Two other regional Fed chiefs — Kansas City Fed President Esther George and St. Louis Federal Reserve President James Bullard — also downplayed the impact of the Delta variant in separate interviews, with Bullard repeating his call for the Fed to start trimming its $120 billion in monthly bond purchases soon.

Many investors, however, think Powell will strike a more dovish tone in his speech at 1400 GMT in the Kansas City Fed’s central banking conference.

The event, which normally takes place in Jackson Hole, Wyoming, but is being held virtually for the second straight year due to the pandemic, has been often used by Fed policymakers in the past to provide guidance on future policy.

“While Chair Powell is likely to … lay the groundwork for an eventual taper, we expect him to err on the side of caution and patience this week given that the macroeconomic landscape has deteriorated since the July policy gathering,” said Candice Bangsund, portfolio manager at Fiera Capital in Montreal, Canada.

The rough consensus in the market is that Powell will likely announce tapering in the fourth quarter, giving a clear signal at one meeting before the actual announcement.

“For Powell, there is no merit in specifying the exact timing for tapering at today’s speech. If he doesn’t drop a clear hint, that will be mildly positive for stocks,” said Kyosuke Suzuki, president of financial algotech company at Ryobi Systems.

Risk-sensitive currencies are likely to gain while the yen is likely to weaken in that case, he added.

The dollar was supported also by caution after a suicide bomb attack in Kabul airport, which killed 13 U.S. troops, 28 Taliban members and scores of civilians.

Islamic State, an enemy of both the Taliban and the West, claimed responsibility.

The attack was carried out as U.S. forces raced to complete their withdrawal from Afghanistan by an Aug. 31 deadline set by President Joe Biden.

“There are worries events in Afghanistan could erode public approval of Biden Administration. Potential geopolitical instability created by U.S. withdrawal would be another source of anxiety,” said Toshiya Nakamura, chief manager of forex at Mitsubishi UFJ Trust Bank.

Elsewhere, the Australian dollar fetched $0.7243, little changed after data showing Australian retail sales plunged in July due to the spread of the Delta variant.

The New Zealand dollar dipped slightly after Prime Minister Jacinda Ardern announced the lockdown in Auckland, the country’s biggest city, is likely to remain in place for further two weeks.

The kiwi last stood down 0.1% at $0.6939.

In cryptocurrencies, bitcoin slipped to $46,743 while ether also eased to $3,084.

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