Dollar steadies as boost from Fed hike expectation fades

London

THE US dollar took a breather in its climb towards a 14-month high on Thursday (Jan 6) after riding the tailwind of minutes from the Federal Reserve's December policy meeting, which bolstered expectations of a US rate hike as early as March.

The meeting minutes showed officials had discussed shrinking the Fed's overall asset holdings, as well as raising interest rates sooner than expected to fight inflation.

Money markets are now pricing nearly an 80 per cent probability of a US interest rate rise by March, and more than 80 basis points of cumulative rate increases in 2022, a huge shift in expectations as only 3 months ago investors were not expecting the first US rate hike until the summer of 2023.

Elsa Lignos, head of FX strategy at RBC Capital Markets, said that while rate hike expectations for 2022 have propped up the dollar, the possibility of more rate hikes for 2023 could provide further strength to the currency. "The consensus narrative seems to be the Fed will 'over-tighten' in 2022 and be forced into slowing down materially in 2023," she wrote in a note.

"We think it's a re-pricing higher for 2023 which has the most potential to boost USD this year, and we are watching this as a key driver for the dollar", she added.

At 1220 GMT, the dollar index, which measures the greenback against major peers, was unchanged on the day at 96.17 after creeping up closer to a 14-month high of 96.93. The greenback nevertheless made substantial gains against some rivals like the Australian dollar, which at one point lost more than 1 per cent.

The Aussie gradually recouped some losses, stabilising down 0.70 per cent at US$0.717. The yen also limited its losses from a high of 116.18 per dollar to 115.84, down 0.23 per cent.

Sterling traded down 0.13 per cent at US$1.3538, having retreated overnight from the US$1.3599 level - its highest in nearly 2 months - following the Fed minutes. The euro stood broadly unchanged, slightly above the US$1.13 mark as it continued to consolidate in the middle of the trading range in which it has sat since mid-November.

Cryptocurrencies were among the hardest-hit in the overnight market sell-off, with Bitcoin nursing losses below the US$43,000 levels after falling more than 5 per cent overnight. REUTERS