Dollar up as markets brace for larger, faster rate hikes

London

THE US dollar soared to its highest levels since July 2020 against other major currencies on Thursday (Jan 27), powered by bets the US Federal Reserve could deliver faster and larger interest rate hikes in the months ahead.

A day after the Fed flagged that it was ready to start lifting rates in March to contain inflation, money markets moved to price in as many as 5 quarter-point increases by year-end.

This backdrop brought dollar bulls out in force - the dollar index, which measures the greenback's value against other major currencies, rose to 97.120, the highest since July 2020.

The euro slumped 0.75 per cent to US$1.1156, its lowest since June 2020. The greenback also hit its highest levels in more than a year against the New Zealand dollar, a 7-week peak against Australia's currency, and rose broadly against emerging market currencies.

The Fed on Wednesday indicated it was likely to raise rates in March, as widely expected, and reaffirmed plans to end its bond purchases that month before significantly reducing its asset holdings.

In a follow-up news conference, Chair Jerome Powell stressed that no decisions had been made, but in response to a question about whether the central bank would consider a 50-basis point hike, he did not rule it out.

US gross domestic product figures later on Thursday are expected to show annual growth at its strongest since 1984.

Rising US Treasury yields provided a further impetus to the dollar's gains.

After rallying 0.7 per cent against the yen on Wednesday in its sharpest rise in more than 2 months, the dollar firmed a further 0.5 per cent to 115.20 yen.

The risk-sensitive Australian dollar fell 0.6 per cent to US$0.7072, having fallen to as low as US$0.7064, while the New Zealand dollar fell to as low as US$0.6597, a nearly 15-month trough. Sterling fell to a 1-month low at US$1.3376 and was last down 0.6 per cent on the day.

In offshore trade, the yuan was down 0.7 per cent against the dollar at 6.3642. It was on track for its biggest 1-day fall since last July. REUTERS