Dollar reigns as hawkish Fed stands out among central banks
The U.S. dollar traded near its highest in over a year to the euro and close to a five-year peak against the yen as a hawkish tilt by Federal Reserve policymakers, buoyed by solid U.S. data, contrasted with more dovish monetary outlooks in Europe and Japan.
The dollar index, which measures the greenback against six major peers, eased 0.1% to 96.733, but remained within touching distance of Wednesday’s high at 96.938, the strongest level since July 2020.
The index has climbed 2.77% this month as traders bet that heated inflation would force earlier interest rate hikes than Fed officials had signalled. The market is fully priced for a first quarter point hike by June, with strong odds it could be delivered as soon as May.
“The USD is in beast mode and just doesn’t want to go down,” Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a client note.
“But when things get too over-loved, the ship can often tip,” he warned.
Minutes of the central bank’s Nov. 2-3 policy meeting showed on Wednesday that various policymakers said they would be open to speeding up the taper of their bond-buying programme if high inflation held, and move more quickly to raise interest rates.
Also overnight, readings on the labour market and consumer spending outstripped economists’ estimates, while inflation continued to heat up.
San Francisco Fed President Mary Daly said in an interview with Yahoo Finance released the same day that she could see a case being made to speed up the Fed’s tapering of its bond purchases.
“The U.S. economy retained its titanium status,” while “slightly hawkish comments from the normally dovish Daly” also helped to lift the dollar, Tapas Strickland, a director of economics at National Australia Bank (OTC:NABZY), wrote in a research note.
The dollar was little changed at 115.355 yen, holding close to the overnight high of 115.525, a level not seen since January 2017.
The euro added 0.13% to $1.1215, but stayed within sight of the near 17-month low hit on Wednesday at $1.1186 after German business confidence slumped for a fifth straight month.
While the U.S. calendar is mostly empty on Thursday due to the Thanksgiving holiday, minutes from the European Central Bank’s Oct. 28 meeting are due for release.
In a news conference after the monetary authority left policy unchanged at that meeting, ECB President Christine Lagarde said officials had discussed “inflation, inflation, inflation,” but after “a lot of soul-searching” had stuck to the view that inflationary forces will prove transitory.
Lagarde gives a speech at an ECB legal conference later on Thursday, at which board members Frank Elderson and Edouard Fernandez-Bollo will also participate.
Sterling rose 0.14% to $1.33465 after dipping as low as $1.3317 on Wednesday for the first time in 11 months.
Investors remain focused on whether or not the Bank of England will raise rates on Dec. 16.
The BOE wrong-footed many investors when it kept policy steady at record lows at the start of the month, following comments from its governor Andrew Bailey in October that policymakers “will have to act” to head off inflation.
Bailey speaks at Cambridge University later on Thursday.
Elsewhere, the risk-sensitive Australian dollar edged up 0.06% to $0.7201, not far from Wednesday’s $0.7185, its lowest level since September.
The New Zealand dollar was little changed at $0.6870, languishing near the three-month low of $0.6856 hit the previous day, when the country’s Reserve Bank raised the key rate by a quarter of a percentage point to 0.75%, disappointing bulls hoping for a half point increase.