The U.S. dollar fell on Wednesday after Federal Reserve Chair Jerome Powell said in remarks prepared for Congress that the economy was "still a ways off" from levels the central bank wanted to see before tapering its monetary support.
His comments came a day after data showed U.S. inflation hit its highest in more than 13 years last month, which lifted the greenback to just shy of its three-month high and sharpened the focus on when central banks around the world will begin withdrawing pandemic-era stimulus.
That focus intensified on Wednesday after the Bank of Canada said it would cut its weekly bond purchases to C$2 billion ($1.6 billion) from C$3 billion, and the Reserve Bank of New Zealand said it was ending bond purchases, raising expectations it could increase rates as soon as August.
Powell said in his prepared comments ahead of his two-day testimony starting later in the day that the Fed is firm in its belief that current price increases are tied to the reopening of the economy and are transitory.
The Fed will continue to deliver support "until recovery is complete," he said.
The dollar index declined after Powell's comments, slipping 0.4% to 92.428. It had earlier risen as high as 92.832 - just below the 92.844 level reached last week for the first time since April 5.
Against the euro, it slipped 0.41% to $1.18245, having earlier touched its highest since April 5 off of Tuesday's inflation reading.
"After the CPI data the dollar gained pretty quickly, considering that every part of that print was higher than expected, and I think traders started to price in the fact that maybe the Fed can't hide behind that word transitory forever," said John Doyle, vice president of dealing and trading at Tempus Inc.
"The dip for the euro back below 1.18 yesterday was probably a little bit overdone and so this recovery today, I think, would have happened even without Powell's comments."
The dollar rose almost 3% last month after the Fed's hawkish pivot forced markets to re-assess when tapering and rate rises might start. It firmed 0.6% on Tuesday after the inflation data.
U.S. producer price inflation also rose more than expected, data on Wednesday showed.
The kiwi meanwhile soared against the greenback after New Zealand's central bank announced it would cut short a NZ$100 billion ($70 billion) bond-buying programme. It added to the gains after Powell's comments, standing 1.19% higher.
Analysts have brought forward calls for a rate rise to as early as August, which would put New Zealand at the forefront of countries to raise interest rates.
The divergence in monetary policy outlooks pushed the Australian dollar 0.79% lower against its New Zealand counterpart to NZ$1.063 , the lowest since early June.
The Canadian dollar cut earlier gains against the greenback after the Bank of Canada in a statement said it would keep interest rates unchanged until economic slack is absorbed, which is expected to happen in the second half of 2022.
"Overall, while the perception is that the Bank is quite hawkish, especially compared with the Fed, we ultimately expect very little daylight between the two banks when it comes to rate hike timing," said Douglas Porter, chief economist at BMO Capital Markets. NEW YORK (Reuters)