Dollar squashed as Fed seen softening inflation stance


The dollar crumbled on Monday as cracks in the U.S. economic recovery drove investors away from the world's reserve currency as they increased bets the Federal Reserve could flag another accommodative shift in its outlook this week.

The greenback fell to a four-month low against the yen, a new 22-month low on the euro and a five-year low against the Swiss franc, while gold minted a record high.

The Fed meets Tuesday and Wednesday after labor data last week showed the U.S. employment recovery wobbling. No major announcements are anticipated but analysts expect policymakers may begin laying the groundwork for more action in September or the fourth quarter.

The U.S. central bank could firm recent hints about the benefits of an average inflation target, which would allow rates to stay lower for longer.

"I think we're seeing the U.S. dollar adjusting to that," said Chris Weston, head of research at Melbourne brokerage Pepperstone.

"If they are to ever get inflation ... then the reaction is to allow the economy to run hot for a large period of time," he said. "So the chance of the Fed raising in the next five years is being repriced in the U.S. dollar - there's a momentum trade as people run this short position into the Fed meeting."

Elsewhere, investors are also beginning to fret about U.S. political deadlock over the next round of fiscal stimulus with a month-end deadline looming to extend some unemployment benefits.

The White House and Senate Republicans agreed on a one trillion U.S. dollars relief package, but that must be negotiated with Democrats who have been pushing for bigger spending.

Last week a recovery in the U.S. job market unexpectedly stalled, while purchasing manager surveys showed Europe's recovery pulling ahead - adding to nerves about any letup in U.S. stimulus.

"Failure to pass additional fiscal measures or a minimalist bill will likely generate a significant shock to markets," said Steve Englander, head of G10 FX research at Standard Chartered in New York.

"We expect a big stimulus package that probably will reflect Democratic priorities on income support and spending."

(With input from Reuters)