US dollar scales 3-month peak as Powell flags higher rates

THE US dollar scaled multi-month highs against most other major currencies on Wednesday (Mar 8), after Federal Reserve (Fed) chair Jerome Powell warned that US interest rates might need to go up even faster and higher than expected to rein in stubborn inflation.

Higher rates benefit the US dollar by improving its yield and as traders look for safety while global stock markets drop.

The US dollar hit a two-month high against the euro of US$1.0524, extending Tuesday’s 1.2 per cent jump. Sterling, the Swedish krona and Norwegian krone, the Chinese yuan and the Canadian, Australian and New Zealand dollars all struck multi-month lows.

The US dollar also broke above its 200-day-moving average against the yen for the first time this year, rising as far as 0.5 per cent to a nearly three-month high of 137.9 yen.

Powell told lawmakers on Capitol Hill on Tuesday that recent US economic data was stronger than expected and so the speed and size of future rate hikes may also need to increase, which sent short-term US rate expectations surging.

“The US dollar will have a short-term tailwind in the next few weeks due to a more hawkish Fed,” said Dane Cekov, senior macro and FX strategist at Nordea.

“We see the Fed hiking to 6 per cent in the coming months and they might move faster now after Powell’s comments.”

Powell is back for more testimony from 1500 GMT, although prepared remarks are expected to be unchanged from those published on Tuesday.

The Canadian dollar – last at 1.3754 to its US counterpart and down more than 1 per cent since Monday – may be vulnerable to further weakness if Canada’s central bank holds rates steady later in the day, as expected.

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“Rate differentials in Canada compared to the US leaves the Canadian dollar under pressure, that’s something the Bank of Canada will need to follow due to imported inflation,” Nordea’s Cekov said.

The Australian dollar has weakened for a similar reason as the Reserve Bank of Australia has softened its tone. Having dropped over 2 per cent on Tuesday, the Australian dollar recouped some losses to trade 0.2 per cent higher at US$0.66.

Powell’s remarks also sent short-term rate expectations higher, with traders now anticipating around a 65 per cent chance of a 50 basis point US rate hike in March, according to CME’s FedWatch tool, up from about a 30 per cent chance a day earlier.

Futures imply US rates peaking above 5.6 per cent and holding above 5.5 per cent through 2023. Traders have a laser focus on Friday’s US payrolls data and next week’s inflation numbers.

“If those data prints exceed expectations at all, based on what Powell said, that’d pretty much guarantee a 50-basis point hike in March,” said IG Markets analyst Tony Sycamore in Sydney.

The US dollar index rose as much as 0.2 per cent to a more than 3-month high of 105.88, having jumped by 1.3 per cent on Tuesday, its biggest daily increase since Sep 23, 2022.

Sterling rose marginally to US$1.1837, after earlier hitting its lowest since late November at US$1.1811.

China’s yuan finished the domestic session at 6.9706 per US dollar, the weakest such close since Dec 29, 2022. REUTERS