Dollar ticks up as case for March Fed hike grows

London

THE dollar ticked up on Monday (Jan 10) amid bets that US inflation will bolster the case for higher interest rates, while the European Central Bank's dovish stance on rising prices weighed on the euro.

The dollar had faced selling late last week after a weaker-than-expected headline US job-creation figure squeezed traders out of long dollar positions. But analysts said better-than-expected unemployment numbers and US inflation figures, which are expected to show headline CPI at a red-hot 7 per cent year on year on Wednesday, make a case for interest rates to rise sooner rather than later.

Traders have priced a more than 90 per cent chance of a rate hike in March according to CME's FedWatch tool. In midday trading in Europe, the dollar index, which measures the greenback against major peers, was up 0.13 per cent at 95.914.

The euro was down 0.33 per cent against the dollar at US$1.13250 with investors sticking to their view that the ECB is still far behind the Fed in the tightening cycle despite data showing eurozone inflation jumped to 5 per cent in December.

ECB board member Isabel Schnabel said on Saturday that rising energy prices may force the central bank to stop "looking through" high inflation and act to temper price growth, but her comments were largely ignored on currency markets. For Kit Juckes, a strategist at Societe Generale, investors still generally believe it is too early in the cycle for the central bank to tighten its policy. "I think it's a story for the second half of the year and next year", he said, adding that Schnabel's comments could nevertheless be seen as a "warning" on the direction of travel.

The euro also hit its lowest level against the pound since February 2020 amid bets that the Bank of England is likely to be hiking in tandem with the Fed. Sterling was however weaker against the dollar, down 0.15 per cent at US$1.3570 but the greenback ticked down 0.25 per cent against the yen at 115.22 but still not far from the recent 5-year high of 116.35.

The Australian dollar wobbled around US$0.7183, finding a little help from a lift in Aussie bond yields. REUTERS