Forex: Dollar holds near three-month highs on rates outlook

The dollar held steady on Thursday near a three-month high, supported by the message from Federal Reserve Chairman Jerome Powell about the need for more interest rate hikes and possibly a faster pace.

On the second day of congressional testimony on Wednesday, Powell reiterated his message, but noted that the debate over the scope and path of future rate hikes is still ongoing and will depend on the data.

This caused the US dollar to halt its sharp rally earlier in the week, and was back near a three-month high against the yen. It fell 0.6 percent to 136.55 yen.

The euro and the British pound settled at $1.0555 and $1.1845, respectively.

The dollar index fell 0.05% to 105.57, staying near a three-month high of 105.88 hit on Wednesday.

And the Chinese yuan in foreign transactions fell to nearly the psychologically important level of seven against a dollar, and it was in the latest transactions down 0.2 percent to 6.9803.

The Canadian dollar fell to its lowest level in nearly five months, and settled in the latest trading at 1.3795 against the US dollar.

The Australian dollar rose 0.3% to $0.6612.

Most Asian currencies moved in a flat-to-low range on Thursday, coming under pressure from softer-than-expected Chinese inflation data, while persistent concerns over rising U.S. interest rates and a hawkish Federal Reserve also weighed.

The Chinese yuan fell 0.2% and was among the worst performers for the day after consumer and producer inflation read weaker than expected for February. The reading, coupled with weak trade data earlier this week and a soft GDP forecast for the year, ramped up concerns that a Chinese economic rebound may not be as pronounced as initially expected.

Soft inflation gives the People’s Bank less headroom to eventually tighten policy – which, coupled with rising U.S. interest rates, is likely to batter the yuan in the near-term. The currency was close to breaking below the key 7 level against the dollar, which could herald more losses.

Weakness in China bodes poorly for broader Asian markets, given their reliance on the country as a major trading hub. Other China-exposed currencies were also under pressure, with the Taiwan dollar and the South Korean won losing 0.2% each.