US dollar holds near 18-month high ahead of busy central bank week

[HONG KONG] The US dollar held most of last week's gains on Monday (Jan 31) but hung just off 18-month highs against major currencies as ebbing market turbulence took some of the bid out of safe-haven assets.

The prospect that investors could see renewed volatility this week remains, however, with key Australian, UK and European central bank meetings taking place in the days ahead.

The euro was at US$1.1161, up 0.16 per cent, having fallen to US$1.1119 last Friday, its weakest since June 2020. The Aussie was at US$0.701, up 0.35 per cent, after touching its lowest since July 2020 on Friday.

The greenback had its best week in 7 months last week, supported by investors seeking safety amid a sell-off in riskier assets and by analysts raising forecasts for US interest rate hikes.

MSCI's 50-country main world index is headed for its worst month since the start of the pandemic although Asian markets regained some composure on Monday.

Market pricing now suggests a more than 90 per cent chance of at least 4 Fed rate hikes by the end of the year and a 67 per cent chance of at least 5.

"The USD 'smiled' again, drawing on a combination of rates repricing and much weaker risk sentiment," said analysts at Barclays.

They said the potential for further US dollar gains based on rate hike expectations was limited, as last week's moves mean an "aggressive normalisation cycle" is now priced in, though weak and volatile equities could push it higher.

The US dollar index, which measures the greenback against 6 major peers was at 97.131, down 0.1 per cent, but still close to Friday's 18-month intraday top of 97.441.

The yen was at 115.47 per US dollar, in the middle of its recent range, buffeted by the headwind of rising US rate expectations with little prospect of rate hikes at home, but supported by some demand for it as a safe haven.

While US payroll figures are out on Friday, the focus this week shifts a little away from the Fed to other central banks.

Australia-watchers await the central bank's Tuesday meeting, amid rising expectations it will announce an end to its quantitative easing programme. That will be followed by a speech by the Royal Bank of Australia's (RBA) governor on Wednesday and a statement on monetary policy on Friday.

The week "will go far to define the psychology of the market for the next few months", said Westpac analysts. "That QE (quantitative easing) will cease will not be a surprise, so the real focus is on the RBA's shifting economic view and its implications for the (benchmark) cash rate."

The Bank of England (BOE) also holds its meeting on Thursday, with a Reuters poll of economists predicting a second rate hike in less than 2 months, as the BOE reverses more pandemic stimulus, after inflation jumped to its highest in nearly 30 years.

The European Central Bank (ECB) also has a policy meeting on Thursday. While no policy change is expected, analysts are starting to warn that approaching rate hikes from the Fed will shrink the ECB's window for action.

In cryptocurrencies, bitcoin was just below US$37,700, after a quiet weekend for the digital asset. REUTERS