Dollar firm as Fed digs in for protracted inflation fight

The dollar was on the front foot on Thursday after minutes from the Federal Reserve's July meeting pointed to US interest rates staying higher for longer to bring down inflation.

The greenback gained most against the Antipodeans, especially the Aussie, which was dragged down as weaker-than-expected wage growth weighed on Australia's rates outlook.

The Australian dollar fell 1.2% on Wednesday to a one-week low of $0.6912. It hovered just above there at $0.6922 in the Asia session, with little reaction to noisy labour data that showed falls in both employment and the jobless rate.

The New Zealand dollar was also pinned to Wednesday lows and was last down 0.2% at $0.6267. The greenback rose marginally on the euro and sterling and was steady on the yen.

"The bigger picture for the dollar is that it's in a strong uptrend," said Matt Simpson, a senior analyst at brokerage City Index in Brisbane, adding it has now paused a weeks-long pullback

"In some ways, bulls are looking to step back in and I think the Fed minutes gave them a reason to do so."

The dollar rose 0.6% on the yen overnight and held at 135.06 yen on Thursday. The euro bought $1.0165 and the dollar index rose 0.1% to 106.740.

Fed officials saw "little evidence" late last month that US inflation pressures were easing, the minutes showed. The minutes flagged an eventual slowdown in the pace of hikes, but not a switch to cuts in 2023 that traders until recently had priced in to interest-rate futures.

"Once a sufficiently restrictive level has been reached, they are going to stick to that level for some time," Rabobank strategist Philip Marey said in a note to clients.

"This clearly stands in contrast to the early Fed pivot that the markets have been pricing in."

Traders see about a 39% chance of a third consecutive 75 basis point Fed rate hike in September, and expect rates to hit a peak around 3.7% by March, and to hover around there until later in 2023.

Sterling and China's yuan , meanwhile, were beset by economic worries.

Weak consumption, low confidence, anaemic credit growth, a property crisis and restrictive Covid-19 policies have cast a long shadow over China's prospects. 

The yuan fell about 0.2% to 6.7928 per dollar.

Britain, meanwhile, is staring at soaring inflation and interest rates. Consumer prices rose at an annual pace of 10.1% in July, the highest since 1982. After blipping higher, growth fears dragged sterling lower and it was last at $1.2040.

It also dropped below its 200-day moving average against the euro. 

"Do we get weaker sterling now, ahead of the inevitable recession? Or will sterling hold around here until rates peak and the economic disaster can dominate," asked Societe Generale strategist Kit Juckes in a note.

"I am confident that we will make a new cycle low this year," he said.