Dollar fell to 3-year lows due to fears of higher inflation in the US

The dollar fell to new three-year lows on Wednesday after Federal Reserve chairman Jerome Powell said that the US central bank would continue to maintain its policy of low rates and buying bonds. It raised fears about an acceleration in inflation.

Those doubts further supported commodity-linked currencies as commodities rose with inflation. In that sense, the Canadian, Australian, and New Zealand dollars reached their highest level against the dollar since the beginning of 2018.

Meanwhile, the dollar index fell 0.1% on the day to 90.058. At the same time, the British pound pierced the threshold of $1.42 during global trading for the first time since April 2018, amid the advance of Covid-19 vaccination in Britain.

The Fed’s commitment to ultra-low rates has led some investors to worry about higher inflation once Congress passes an ambitious additional fiscal stimulus package.

According to Joe Manimbo, senior analyst at Western Union Business Solutions, by keeping the course, the Fed has reinforced optimism in the economic outlook, boosting currencies with close ties to global growth. Although the dollar has lost steam, its decline has been slowed by high yields on Treasury bonds.

The dollar’s weakness in recent days has also been generated along with a strong rise in the returns of US debt. The benchmark yield on the 10-year Treasury note is close to its highest levels in a year.

But the Fed’s commitment to its monetary policy has some investors worried that inflation could outpace growth.

AUD/USD gained strong upside momentum

The AUD/USD pair managed to get above the resistance at 0.7980. It tries to test the psychologically important 0.8000 level while the US dollar is under pressure.

Forex traders will focus on the US bond market development and the country’s economic data today. US treasury yields are trying to settle higher. However, they still fail to provide support to the dollar.

US stocks keep moving higher, and it means that risk appetite remains high. It is bullish for riskier currencies such as the Australian dollar. Besides, commodity markets can keep the rally, which will provide more support to commodity-backed currencies. 

 The US is forecast to report Initial Jobless Claims. The number is expected to have dropped from 861,000 to 838,000. Meanwhile, Continuing Jobless Claims shrunk from 4.49 million to 4.47 million. 

It is still unknown whether this data will affect the dollar, as the market is currently focused on the upcoming US stimulus package and rising yields.

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