Dollar drops as Fed's Powell repeats disinflation comments, seen less-hawkish

Illustration photo of a U.S. five dollar note
A U.S. five dollar note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration

NEW YORK, Feb 7 (Reuters) - The dollar fell from one-month highs on Tuesday after U.S. Federal Reserve Chair Jerome Powell doubled down on statements last week that disinflation has started, saying he expects significant declines in inflation this year.

Powell did not revert to a hawkish stance despite last Friday's blockbuster U.S. non-farm payrolls report, which led investors to believe the Fed is not likely to tighten more than what has been priced in by the market.

The greenback dropped across the board, led by losses versus the yen, Swiss franc, as well as the Australian and New Zealand dollar.

In a question-and-answer session at the Economic Club of Washington, the Fed chief did say the return to the U.S. central bank's inflation goal of 2% would be a bumpy process, which would need further rate increases.

Powell, however, declined to equate the surprising strength in the job market shown in the January employment report with an expectation that interest rates would need to be higher than Fed officials estimated late last year.

Friday's U.S. jobs report wrongfooted traders who were banking on an imminent pause in the Fed's rate-hike cycle, and gave the dollar a leg up.

"Powell had a chance to signal a shift to a more aggressive posture and he didn't take it," wrote Bill Adams, chief economist at Comerica Bank in research note after remarks from the Fed's top official.

"In the near-term, the Fed will likely continue to make one (or perhaps two) more hike(s) before going on hold.

The dollar index , which measures the performance of the greenback against a basket of six other currencies, fell to session lows after Powell's remarks. It was last down 0.2% at 103.39

U.S. interest-rate futures show that markets are expecting the Fed funds rate to peak just above 5.1% by June, compared with expectations of a peak below 5% prior to Friday's jobs report.

In afternoon trading, the euro was little changed against the dollar at $1.0719 after earlier falling to a five-week low of $1.0670.

The dollar dropped 1.2% versus the yen to 131.07 yen , after rising to a one-month peak on Monday. The yen was hit by a Nikkei report that said Japan's government has sounded out Bank of Japan (BOJ) Deputy Governor Masayoshi Amamiya to succeed incumbent Haruhiko Kuroda as central bank governor.

Amamiya is seen as more dovish than other contenders.

Sterling was up 0.1% against the dollar $1.2035 after tumbling to a one-month low of $1.1974 in the previous session.

Investors are looking for further commentary from central bankers this week following what was viewed as a dovish outcome of Bank of England's meeting last week. The Australian dollar was up 0.9% at US$0.6943 after having surged as much as 1% after the country's central bank raised its cash rate by 25 basis points and said more increases would be needed, a more hawkish policy tilt than many had expected.


Currency bid prices at 3:12PM (2012 GMT)

Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Susan Matthew; Editing by Marguerita Choy

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