SYDNEY, May 2 — The US dollar took a breather in Asia today after recovering from a brief spill overnight when markets were whipsawed by mixed messages on policy from the Federal Reserve.

Liquidity was lacking with both Japan and China on holiday and little in the way of major economic data in the diary. The break was welcome after a volatile session overnight.

The dollar had taken an initial knock from a surprisingly sharp retreat in the ISM index of manufacturing to 52.8, which overshadowed a strong ADP report on hiring.

It fell further when the Fed downgraded its inflation outlook and made a technical cut to rates on excess reserves.

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All that changed when Fed Chair Jerome Powell said the factors dragging on inflation might be “transitory” and he saw no case for a rate move in either direction.

The net result was a rebound in a US dollar index against a basket of currencies to 97.616, having earlier traded as low as 97.149.

The euro was back at US$1.1200, after reaching as high as US$1.1265, and the dollar steadied at 111.44 yen from a low of 111.03.

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Bonds likewise see-sawed with the two-year yield first diving to a one-month trough of 2.206 per cent, only to end yesterday's session 4 four basis points higher at 2.308 per cent.

As the dust settled, the market had scaled back just a little of its wagers for Fed rate cuts this year.

“Our view remains that the Fed has completed its policy normalisation process and we should expect an extended period of rates on hold,” said Joseph Capurso, senior currency strategist at CBA. “But the risk to our forecasts have changed.”

“If the FOMC is to change the Funds rate over the next few years, it is likely to be a cut,” he said, citing slowing inflation, record-low inflation expectations and flat wages.

The next major test for the dollar will be US payrolls on Friday tomorrow where any surprise has the power to shift Fed rate expectations all over again.

Sterling was one of the few currencies to buck the dollar, touching a two-week high yesterday on speculation Brexit talks between the British government and the main opposition party were making some progress.

The pound was last at US$1.3054 in Asia, having been as high as US$1.3101 overnight. — Reuters