By Sujata Rao
LONDON (Reuters) - The dollar slipped on Thursday off one-month highs reached after the Federal Reserve set the stage for interest rate hikes next year and a pick-up in global market sentiment encouraged traders to foray out of the greenback.
The Fed headlined a week of central bank meetings that will likely see Norway become the first developed nation to raise interest rates since the pandemic. The Fed too struck a hawkish tone, setting the stage to start tapering bond purchases in November and at a faster pace than analysts had anticipated.
Nine of the U.S. central bank's 18 policymakers projected borrowing costs will need to rise next year, inducing markets to bring forward the timing of the first rate rise to January 2023.
The dollar and bond yields however fell, with many seeing the Fed as having left some policy wiggle room to slow down if needed. There was also relative calm on the Chinese front, even though stricken developer Evergrande is unlikely to meet a bond coupon due on Thurday
"A lot of the dollar strength we saw on Friday and Monday was down to risk aversion. The Fed slightly raised its median (interest rate) expectations for 2023 but you are still talking of a terminal rate of 1.5%-1.7% which is ok but not situation where you get an aggressive bid for the dollar," said Peter Kinsella, head of FX strategy at asset manager UBP.
"To get the dollar to strengthen much you need to see the front end (of the Treasury yield curve) steepen and that's not happening."
The gap between five-year notes and 30-year bonds fell below 100 basis points after the Fed statement, the lowest since July 2020 while the 2-year/10-year curve has flattened more than 50 bps since end-March.
By 0745 GMT, the dollar index was at 93.277, down a quarter percent on the day and having risen as high as 93.526.
The euro was up at $1.1716, a month high while sterling also rose ahead of a Bank of England meeting which is expected to strike a hawkish tone.
The Norwegian crown was flat against the dollar and up 0.2% versus the euro before a central bank meeting that could see interest rates raised..
The Norwegian crown has rallied almost 5% versus the dollar in the past month and is near a three-month high against the euro and analysts reckon significant gains are unlikely "Long crown positioning has been rebuilt significantly in recent weeks, so the hurdle is quite high for a positive crown reaction," RBC analyst Adam Cole told clients. The Norges Bank had already flagged the possibility of a second rate hike this year so markets would focus more on updated forward guidance, Cole noted, adding "there is some risk Norges Bank revises its projections higher again." Earlier in Asia, moves were modest with Japan on holiday and the yuan edging to one-month lows versus the greenback. But the Australian dollar firmed 0.3% against the greenback to $0.7261, benefiting also from a strong set of "flash" PMI figures. IHS Markit Purchasing Managers Index (PMI) showed Australian manufacturing activity at 57.3, speeding up from 52 in August and soothing fears of the impact of COVID-linked lockdowns. 