US dollar at highest level in more than two months

London

THE US dollar carried on strengthening on Thursday, reaching its highest in more than two months, after the US Federal Reserve surprised markets by signalling it would raise interest rates and end emergency bond-buying sooner than expected.

Fed officials on Wednesday projected an accelerated timetable for rate increases, began talks on how to end emergency bond-buying, and said that the Covid-19 pandemic was no longer a core constraint on US commerce.

A majority of 11 Fed officials pencilled in at least two quarter-point rate increases for 2023, adding in their statement that they would keep policy supportive for now to encourage a labour market recovery.

US Treasury yields rose by the most since early March, while equities fell. Having on Wednesday clocked its biggest daily gain since March 2020, the US dollar was steady during Thursday's Asian session and then extended gains as European markets opened.

At 1030 GMT, the US dollar index was up 0.5 per cent on the day at 91.825, its highest since April 13. The euro dropped versus the US dollar, with euro-dollar changing hands at a two-month low of US$1.19295.

"We think USD will hold on to its gains," Elsa Lignos, global head of FX strategy at RBC Capital Markets, wrote in a note to clients.

"In order to build on those gains, we need some further positive data surprises." Deutsche Bank strategists said they were closing their long euro-versus- US dollar trade recommendation, which was based on the Fed being dovish.

"One thing is clear: the Fed is no longer willing to push back on market pricing nor is it as committed to its transitory inflation narrative," the bank said in a note to clients.

"We see the combined effects as dollar bullish: there is greater scope for a front-end real rate repricing in the US yield curve rather than just breakevens, as well as room for higher volatility."

The pound and Canadian dollar - which had benefited from the expectation that their respective central banks would tighten policy more quickly than the Fed - lost out. Both fell to a six-week low versus the US dollar. The US dollar gained as much as 1.2 per cent against the Swedish crown.

Versus the Swiss franc, the US dollar was up 0.8 per cent at 0.9153 - also a six-week high.

The Kiwi dollar strengthened after data showed New Zealand's economy grew much faster than expected in the first quarter. But by 1039 GMT, it was down 0.3 per cent on the day at US$0.7027. REUTERS