The Dollar Has Crossed a Six-Week High as Traders rise their Fed bets.
The dollar rose to a six-week high against a basket of currencies on Friday, as traders increased their bets that the Federal Reserve will raise rates sooner than expected and keep them there for longer, as it battles persistently high inflation while maintaining a strong employment picture. Two Federal Reserve officials said on Thursday that the US central bank should have raised interest rates more than it did earlier this month, and that additional rate hikes are needed to bring inflation back to target levels.
Major banks are also raising their forecasted rate hikes. Goldman Sachs expects the Fed to raise rates three more times this year, by a quarter of a percentage point each time, following data this week that showed persistent inflation and labor market resilience. "Right now, the markets are experiencing a significant reset due to Fed rate hike expectations," said Edward Moya, senior market analyst at OANDA in New York. "It appears that the current wave of inflation is proving to be troubling for policymakers everywhere, and we may see global monetary policy become much more restrictive."
The cost of energy products drove up monthly producer prices in January, according to data released by the United States on Thursday, while the number of Americans filing new claims for unemployment benefits unexpectedly fell last week. Concerns about the impact of higher interest rates on the economy are also weighing on risk sentiment, giving the US dollar a boost. "We're starting to see risk aversion take hold, which is also causing some safe-haven flows for the dollar," Moya said. Fed funds futures traders now expect the fed funds rate to reach 5.31% in July and remain above 5% for the rest of the year. The Fed's target range now stands at 4.5% to 4.75%, up from 0% to 0.25% in March 2022.
The dollar index was last up 0.17% at 104.27, having previously reached 104.67, its highest level since January 6. The euro fell 0.24% to $1.0647 after falling to $1.06125 earlier in the day, its lowest level since January 6. Officials from the European Central Bank (ECB) have also stated that they expect eurozone interest rates to rise further. "There is a risk that inflation proves to be more persistent than financial markets are currently pricing," German ECB official Isabel Schnabel told Bloomberg on Friday. The dollar rose 0.41% against the Japanese yen to 134.49, having previously reached 135.12, its highest level since December 20. Sterling was unchanged at $1.1985, after falling to $1.19150, its lowest level since January 6. According to data released on Friday, British consumers unexpectedly increased their spending in January.