Dollar Down, Investors Break Down ECB’s Warning Against Early Narrowing Expectations

On Friday the dollar was down, caged into a narrow trading range as investors await a U.S. Federal Reserve meeting in the following week. On April 28 the Fed will hand down its policy decision, when it is widely expected to keep its current policy largely unchanged.

Although investors will be on the lookout for any comments about scaling back monetary easing in the future, Fed Chairman Jerome Powell is likely to repeat European Central Bank (ECB) President Christine Lagarde’s warning that expectations of tapering of bond purchases as the ECB handed down its policy decision on Thursday.  If that is Powell’s message when the Fed hands down its own policy decision in the following week, it will likely put downward pressure on Treasury yields and cap the greenback’s gains.

As for Euro, it fell after Lagarde shut down expectations that ECB will start to consider tapering as the economic outlook improves in the continent. France targets re-opening schools on Monday and lifting domestic travel curbs, which started earlier in the month, on May 3.

Although the improving outlook and rising COVID-19 vaccination rates continue to boost investor sentiment, investors scaled back expectations for a withdrawal of monetary easing policies after Lagarde repeated that the talk of phasing out emergency bond purchases is premature.

Mizuho Securities chief currency strategist Masafumi Yamamoto told Reuters, “Powell has to reiterate the continuation of easy monetary policy just like Lagarde… as a result, the dollar is likely to fall against the yen, but the larger trend for the dollar is still mixed. The dollar can still rise against commodity currencies if commodity prices start falling again.”