US dollar powers to six-week high as interest rate expectations rise

THE US dollar rose to a six-week high on Friday (Feb 17) as strong US economic data and comments from Federal Reserve (Fed) officials led to traders betting more interest rate rises are coming.

Data on Thursday showed the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, and that monthly producer prices increased by the most in seven months in January.

St Louis Fed president James Bullard said on Thursday he backed further rate increases that would take borrowing costs to around 5.25 per cent to 5.5 per cent.

The Fed’s target range currently stands at 4.5 per cent to 4.75 per cent, having risen rapidly from 0 per cent to 0.25 per cent in March 2022.

The euro fell 0.38 per cent to its lowest since Jan 6 at US$1.063.

“The Fed is now allowed to sound as hawkish as it wants to be because the data has been so strong,” said Francesco Pesole, FX strategist at Dutch bank ING.

“Since the jobs data, pretty much all new releases in the US have come in on the strong side,” he said, referencing the blockbuster employment report on Feb 3.

“The US dollar is moving higher. Markets are definitely moving towards higher rate expectations.”

The US dollar index was last up 0.64 per cent at 104.52, its highest since mid-January.

Economists at Goldman Sachs on Thursday increased their expectations for Fed interest rate increases this year.

Having previously expected two more, they told clients in a note that they now expected three consecutive 25 bp rises, in March, May and June, “in light of the stronger growth and firmer inflation news”. That would take rates to 5.25 per cent to 5.5 per cent.

Against Japan’s yen, the US dollar rose 0.85 per cent to 135.06, the highest since mid-December. It was on track for a weekly gain of roughly 2.8 per cent, its largest rise since June.

Japan’s government picked academic Kazuo Ueda as its new central bank chief on expectations he can help keep inflation on target and sustain economic growth and wage increases, Finance Minister Shunichi Suzuki said on Friday.

Sterling was down 0.45 per cent to US$1.193, its lowest since Jan 6. That was despite British consumers unexpectedly increasing their shopping in January.

The Swiss franc was also caught up in the US dollar’s surge. The US dollar rose 0.79 per cent to 0.933 francs, its highest level since mid-January.

Benchmark US Treasury yields have surged as investors have raised their expectations for where interest rates will end up. Yields move inversely to prices.

The yield on the two-year US Treasury hit a more than three-month high of 4.718 per cent on Friday.

European Central Bank (ECB) officials have also made clear that they expect eurozone rates to keep rising.

“There is a risk that inflation proves to be more persistent than is currently priced by financial markets,” German ECB official Isabel Schnabel told Bloomberg on Friday.

Eurozone bond yields rose sharply to end the week. REUTERS