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Stimulus talk positivity dips dollar

The growing likelihood that Congress will pass President Joe Biden’s $1.9 trillion stimulus plan has stoked fears about a possible spike in inflation. As those expectations have risen, so has the popularity of the so-called reflation trade, which this month has pulled the dollar lower.

But in testimony before the US Senate Banking Committee, Powell said the central bank would keep its policies in place as it focused attention on getting Americans back to work.

“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” said Powell.

Powell in 2020 said the central bank would be willing to allow inflation to run higher than its target rate for periods of time in order to average 2%.

While Powell did not allay the inflation fears, the central bank’s overall support for the economy may have kept the dollar afloat on Tuesday.

“For the dollar, the jury remains out with regards to which direction the next major move will be, though for now, inflation concerns may be offset by hopes for a quicker US economic recovery, as vaccine distribution is expected to ramp up in the coming weeks,” said Ronald Simpson, managing director, global currency analysis for Action Economics.