US dollar holds near three-month high as rates reality kicks in

THE US dollar held near a three-month high on Thursday (Mar 9), underpinned by Federal Reserve chair Jerome Powell’s message that interest rates will have to go higher and possibly faster than investors previously anticipated.

The yuan fell after China reported unexpectedly low inflation.

In the second day of his testimony to Congress on Wednesday, Powell reiterated his message, though he struck a cautious note, saying debate on the scale and path of future rate hikes was still underway and would depend on data.

The US dollar index eased 0.1 per cent to 105.44, but was within sight of Wednesday’s three-month high at 105.88.

It was last down by 0.8 per cent against the yen at 136.29, while the euro and sterling both edged up.

The euro was last up 0.1 per cent at US$1.0555, while sterling rose 0.4 per cent to US$1.1885. The pound lost 1.5 per cent this week against the US dollar, underperforming the euro and the yen, which have lost 0.7 per cent and 0.3 per cent against the greenback, respectively.

“Powell conceded that the March decision is data-dependent,” said Thierry Wizman, Macquarie’s global FX and rates strategist. “The question facing us, therefore, is whether January’s economic re-acceleration was a blip or a trend.”

A slew of US strong economic data in recent weeks, pointing to persistent inflationary pressures, led to Powell saying on Tuesday that the Fed would likely need to raise interest rates more than expected.

Fed funds futures now imply a nearly 70 per cent chance that the Fed will raise rates by 50 basis points this month, up from just about 9 per cent a month ago.

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US rates are also seen holding above 5.5 per cent till the end of the year.

“The reality remains that markets are slowly starting to come to the realisation that rates are likely to remain higher for longer, and that the terminal rate is also likely to settle at a much higher level,” CMC Markets chief strategist Michael Hewson said.

The yuan weakened after China posted data showing the slowest annual consumer price inflation in a year in February, fanning doubts about the pace of economic recovery.

The Chinese offshore yuan languished near the key psychological level of seven per US dollar, and was last 0.2 per cent lower on the day at 6.981.

The Bank of Canada on Wednesday left its key overnight interest rate on hold at 4.50 per cent, in a sign that major central banks are beginning to pause their monetary tightening campaigns.

On Thursday, the Canadian dollar weakened to an almost five-month low and was last flat at 1.3805 per US dollar.

The Australian dollar was likewise kept under downward pressure and for a similar reason, though was last 0.3 per cent higher at US$0.6611.

Reserve Bank of Australia governor Philip Lowe on Wednesday said the central bank was closer to pausing on rate hikes and suggested a halt could come as soon as April.

“Lowe seemed open to a growing divergence in the path of monetary policy between Australia and the US,” said Belinda Allen, senior economist at Commonwealth Bank of Australia. REUTERS