Dollar pauses ahead of Fed testimony, cryptocurrencies attempt recovery

© Reuters. FILE PHOTO: Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking/File Photo

By Ritvik Carvalho

LONDON (Reuters) - The dollar paused for breath on Tuesday as traders looked to testimony from Federal Reserve Chair Jerome Powell for further guidance on the recent surprise shift in the central bank's policy outlook, while support crept back for cryptocurrencies.

The greenback had gained sharply since the Fed last week flagged sooner-than-expected interest rate hikes, although it dipped on Monday to hand back a little bit of that rise.

Against the euro, the dollar nursed an overnight loss of about 0.4% to steady around $1.1909. It crept higher to 110.42 yen, while the dollar index was flat at 91.965 after a loss of about 0.5% on Monday.

The Australian and New Zealand dollars eased after Monday's bounce from multi-month lows, with the Aussie down 0.4% to $0.7511 and the kiwi down 0.1% to $0.6980.

"The hawkish shift by the Fed last week is playing out as a dollar positive mainly in the short-term rates markets," said Valentin Marinov, head of G10 FX research at Credit Agricole (OTC:CRARY).

"Indeed, market bets on earlier and more aggressive Fed hikes are boosting the dollar's rate advantage versus other currencies."

In the medium term, investors will be keenly focused on the U.S. labour market as its performance is likely to influence the Fed's attitude. In the nearer future all eyes are on Powell, who appears before Congress from 1800 GMT.

In prepared remarks he noted sustained labour market improvement and the recent increase in inflation.

"We suspect that, unlike the hawk Bullard, Fed Chair Powell could advocate a start of the tightening cycle in 2023 and thus help calm the market's nerves in the very near term," Marinov said.

"To the extent that the Fed signals of a more gradual pace of stimulus removal help soothe the worst of market fears, risk-correlated currencies could recover."

On Monday hawkish Fed officials such as St. Louis Fed President James Bullard and Dallas Fed President Robert Kaplan remarked on the risks of acting too slowly.

However, New York Fed President John Williams (NYSE:WMB) said it was too soon to shift policy, and that he expects inflation to ease from about 3% this year to close to 2% in 2022 and 2023 - leaving markets none the wiser.

"The Fed is nearly always late on such things," said RBC Capital Markets' chief economist Tom Porcelli, who thinks core inflation could be higher - just under 3% - by the end of 2022.

"That is not 2% inflation," he said in a note, adding it is going to eventually apply pressure to the Fed to move on rates.

"In the meantime, we have no doubt with that 2% forecast as cover, Powell will attempt to play down the likelihood of a rate hike next year. But just as he eventually relented on taper talk, he will relent on dismissing talk about hiking rates too. Just give it more time."

Fed member Loretta Mester is also due to make a speech on Tuesday.

Elsewhere sterling fell 0.3% to $1.3893, holding on to its overnight bounce as investors look forward to the British economy reopening further on July 19.

Bitcoin and other cryptocurrencies found something of a footing after slumping on Monday when a tightening crackdown on trading and mining in China, as well as technical factors, whacked the asset class.

On Tuesday they held above May lows, with bitcoin at $32,780 and Ether at $1,945.