Fed-fuelled US$ rises as bears rush for exit

New York

THE dollar extended its advance against a basket of currencies on Friday, building on the gains logged after the US Federal Reserve earlier last week surprised markets by signalling it would raise interest rates and end emergency bond-buying sooner than expected.

The dollar index, which tracks the greenback against six major currencies, was up 0.37 per cent at 92.213, its highest since mid-April.

That puts the index on pace for a weekly gain of nearly 2 per cent, its best weekly jump in about 14 months.

The jolt to foreign exchanges was triggered on Wednesday by Fed forecasts showing 13 of the 18-person policy board saw rates rising in 2023, versus only six previously, with the median board member tipping two hikes in 2023.

Investors' risk appetite took another hit after St Louis Federal Reserve president James Bullard said on Friday that the US central bank's shift this week towards a faster tightening of monetary policy was a "natural" response to economic growth and particularly inflation moving quicker than expected as the country reopens from the coronavirus pandemic.

With investors pricing in a sooner-than-expected tapering of extraordinary US monetary stimulus, the euro and the yen have come under selling pressure over the last few trading sessions.

The unwinding of sizeable bearish bets against the dollar is expected to provide support for the greenback in coming days, investors said.

Goldman Sachs Asset Management's head of currency, Arnab Nilim, who had been short in the US currency headed into the June Fed meeting, told Reuters he has reduced the position and expects the US dollar to perform well, especially against the low-yielding currencies.

With a dovish European Central Bank seemingly far behind the Fed in the monetary policy cycle, traders will be reluctant to buy euros against dollars.

"The US central bank is one step ahead and as a result US dollar is likely to remain well supported against the euro," Commerzbank strategists said in their daily note.

With equity markets hurting, the Australian dollar - seen as a proxy for risk appetite - was down 0.68 per cent at 0.74995, its lowest since December 2020.

Sterling extended its fall against the US dollar on Friday, dropping below US$1.39, hurt by the Fed's hawkish surprise and an unexpected fall in Britain's retail sales. REUTERS