Dollar loses support as rates outlook settles

© Reuters. FILE PHOTO: A picture illustration of U.S. dollar, Swiss Franc, British pound and Euro bank notes, taken in Warsaw January 26, 2011. REUTERS/Kacper Pempel/File Photo

By Tom Westbrook

SYDNEY (Reuters) - The dollar was nursing losses and below key support levels on Thursday after U.S. inflation proved no hotter than expected in December and prompted investors to cut crowded long positions.

After a couple of months in a tight range, the dollar dropped 0.6% on the euro on Wednesday to $1.1453, its lowest since mid-November. There isn't major chart resistance to further losses until $1.1525. It held at $1.1443 in Asia.

It also fell 0.6% on the yen, dropping through support around 115 to hit 114.38 yen per dollar, a more than two-week low. It last bought 114.55 yen.

The greenback's weakness has helped the Australian dollar crack resistance and sent it up through its 50-day moving average to an almost two-month top of $0.7292, where it held through the Asia session. [AUD/]

December's monthly U.S. inflation figures published on Wednesday were a fraction higher than forecast and at 7%, the increase in year-on-year CPI was as expected.

Even though that was the biggest jump since June 1982, traders don't see it urgently shifting an already hawkish Fed too much. With at least three rate hikes already in the market price, some investors pared bets on further dollar gains.

"I don't think it was anything within the components of the CPI that caused the market to take a sigh of relief," said NatWest markets' strategist Jan Nevruzi in a note.

"Would a 6.7% or 7.3% print really have changed the Fed's trajectory in the next few months or this year – I do not think so."

The best performing majors in a fairly quiet Asian day were the kiwi and sterling as central banks in both places look to be on an even more aggressive path than the Fed.

Sterling, which has been rallying as traders reckon Britain's economy can survive a surge in COVID-19 cases and that the Bank of England is going to get started on hikes as soon as next month, is testing its 200-day moving average at $1.3717.

It is up 4% from December lows and traders have so far shrugged off a political crisis enveloping Prime Minister Boris Johnson who apologised for attending a party in the Downing Street garden during a coronavirus lockdown.

Hikes have already begun in New Zealand and the New Zealand dollar has touched its 50-day moving average at $0.6862, a gain of 0.2% in the session.

The Canadian dollar has also rallied more than 3.5% in three weeks, gaining with oil prices as investors look past the potential economic fallout of the Omicron variant. The U.S. dollar index is hovering near a two-month low at 94.962.

Later on Thursday, Fed Governor Lael Brainard appears at Congress for a hearing into her nomination as deputy chair and in two weeks the Fed holds its first meeting of the year.

"The dollar does not have to increase because the Fed is readying a tightening cycle," said Commonwealth Bank of Australia (OTC:CMWAY) strategist Joe Capurso.

"It is not a simple equation of Fed hikes equals dollar increases. The dollar is a counter-cyclical currency which decreases as the world economy recovers."