FOREX-Dollar steadies, currency investors seek hawkish central banks

Reuters

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    * Dollar index edges lower, set for weekly fall
    * EUR/USD 6-month implied volatility near pre-pandemic lows
    * Currency markets unconcerned by inflation data
    * Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

 (Updates prices, adds commentary and chart)
    By Elizabeth Howcroft
    LONDON, June 11 (Reuters) - The dollar stabilised on Friday
and major currency pairs were stuck within recent ranges as
markets shrugged off Thursday's high U.S. inflation number,
believing the Federal Reserve's stance that it is likely to be a
temporary blip.
    U.S. consumer prices rose 5% year-on-year in May, the
biggest jump in nearly 13 years.  urn:newsml:reuters.com:*:nL2N2NR2Q5
    Currency markets had been sluggish all week in anticipation
of the data, but when it came in above expectations, there was
little market reaction. The Federal Reserve has repeatedly said
that it expects any rise in inflation to be temporary and that
it is too soon to be discussing reducing its monetary stimulus.
    The dollar index edged lower in the Asian session but picked
up later in the day. At 1056 GMT it was up 0.1% on the day at
89.995  =USD . It was on track for a small weekly gain of 0.1%.
    "We agree with the Fed that elevated inflation pressures
will prove short-lived," UBS strategists said in a note to
clients.
    "Both Federal Reserve and European Central Bank policymakers
have been unusually consistent in stressing that policy will
only need to be tightened if inflation becomes more sustained
-which they currently view as unlikely."
    There were signs of slightly increased risk appetite in
currency markets, with the Australian dollar up against the U.S.
dollar  AUD=D3 . But the British pound slipped to $1.4159
 GBP=D3 .
    
    LONGER-TERM FLOWS
    A dovish stance from the ECB at its meeting on Thursday had
little effect on the euro, which slipped on Friday to $1.2152
and was set for a small weekly loss of around 0.1%  EUR=EBS .
 urn:newsml:reuters.com:*:nL2N2NS0FH
    A gauge of euro-dollar implied volatility over a six-month
horizon was at its lowest since early March 2020, almost back to
the levels it was at before the COVID-19 pandemic caused
volatility to spike  EUR6MO= .
    Neil Jones, head of FX sales at Mizuho, said he was getting
a lot of questions from clients about central banks that are
likely to raise rates before the Fed and the ECB.
    "There's some interest in going long those currencies
because of potential longer-term FDI (foreign direct
investment), inward investment flows. Money could gravitate
towards those economies that are at the forefront of coming out
of the pandemic," he said.
    The British pound, Canadian dollar, Australian dollar and
New Zealand dollar are currencies that may gain against a weaker
U.S. dollar, Jones said.
    ING strategists wrote in a note to clients that the "glut of
liquidity" from central banks was driving a search for "carry".
In currency trading, "carry" refers to gains from holding
higher-yielding currencies.
    "This environment should continue to see the dollar gently
offered against those currencies with good stories (monetary
tightening or commodity exposure) and a little carry," ING said.
     Russia's central bank increased its key interest rate to
5.5% on Friday, increasing the cost of lending for the third
time this year due to rising inflation, and said more hikes
would be needed.  urn:newsml:reuters.com:*:nL5N2NQ4R7 urn:newsml:reuters.com:*:nL3N2NP4PT 
    
    BITCOIN, ETHER
    Elsewhere, in cryptocurrencies, bitcoin recovered slightly
this week while ether was set for a 9% weekly drop  BTC=BTSP 
 ETH=BTSP . Both have stabilised so far this month but are still
trading significantly below their mid-May peaks.
    Attention now turns to the Fed meeting next week. The
central bank is likely to announce in August or September a
strategy for reducing its massive bond-buying program, but won't
start cutting monthly purchases until early next year, a Reuters
poll of economists found.  urn:newsml:reuters.com:*:nL3N2NR3I0
    Meanwhile, leaders of the Group of Seven wealthiest
economies are meeting in the English seaside resort of Carbis
Bay. Although the meeting is not expecting to contain
market-moving events, if the leaders agree to provide more
vaccines to countries where there is a shortage, then those
countries' currencies could benefit, Mizuho's Jones said.
 urn:newsml:reuters.com:*:nL2N2NS21Y

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World FX rates    https://tmsnrt.rs/2RBWI5E
US 10-year yield poised for biggest1-week drop in a year    https://tmsnrt.rs/3cwhGzy
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 (Reporting by Elizabeth Howcroft; Editing by Emelia
Sithole-Matarise and Pravin Char)
 ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))

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