Dollar stable after dovish comments by US policymakers

The dollar drifted lower on Monday after posting its biggest weekly drop in two months as investors pared some long positions after dovish comments by U.S. policymakers last week.

Against a basket of its rivals, the greenback slipped 0.1 per cent at 96.38 after falling nearly half a per cent last week, its biggest weekly drop since late September.

"We are seeing some signs of weakness emerge on some of the U.S. indicators particularly housing and some new orders indexes and the latest comments by the Fed needs to be taken in that context," said Kamal Sharma, director of G10 FX strategy at Bank of America Merrill Lynch based in London.

Richard Clarida, the Fed's newly appointed vice chair, cautioned about a slowdown in global growth, saying "that's something that is going to be relevant" for the outlook for the U.S. economy.

Federal Reserve Bank of Dallas President Robert Kaplan, in a separate interview with Fox Business, also said he is seeing a growth slowdown in Europe and China.

Their comments came at a time when long dollar positions have swelled to their biggest levels in nearly two years despite a modest decline last week, according to the latest futures data.

The dollar has been the surprise winner of 2018, having risen nearly 10 per cent from April lows thanks to a combination of interest rate hikes and strong data. But the growing view that U.S. economic growth may have peaked has begun to eat away at these gains.

DOLLAR PEAK

In a 2019 outlook note, strategists at Goldman Sachs said the greenback may decline as much as 6 per cent against most of its developed market rivals as the U.S. economy starts to slow with the impact from tax cuts and easy conditions fading through the year.

While market expectations remain of broadly three more rate hikes until the end of 2019, bets of a rate hike next month have trimmed slightly to 69 per cent from 76 per cent, according to the CME's Fedwatch tool.

"Dovish Fed comments on Friday gave some encouragement to investors to take profits on dollar positions which have risen in recent weeks," said Jane Foley, head of FX strategy at Rabobank based in London.

Latest U.S. Treasury holdings data also weighed on the dollar. China and Japan, the two biggest foreign U.S. creditors, cut their U.S. Treasury holdings further in September as foreign appetite for Treasuries declined.

Notwithstanding the dollar's softness, investors were wary of shorting the greenback heavily due to its widening interest rate differentials with other asset classes, especially bonds.

Despite the dollar's weakness, the euro failed to rally significantly above the $1.14 levels as concerns over negotiations between Brussels and Rome over Italy's budget plans sapped broader appetite. It was changing hands at $1.1422.

Elsewhere, sterling remained in the spotlight with the currency expected to stay under pressure until the market gets more clarity on the progress of the Brexit deal.

It was 0.2 per cent lower against the dollar at $1.2817 after a 1 per cent drop last week as British Prime Minister Theresa May's draft EU divorce deal met with stiff opposition and several ministers resigned.

(With inputs from agencies.)