As Traders Prepare For higher Returns, The Dollar Rises
The dollar was at a seven-week high versus the euro and the Australian currency on Thursday, as market participants anticipated that the Federal Reserve will continue on its aggressive rate-hike path, as evidenced by minutes from its most recent policy meeting.
Virtually all Fed officials supported slowing the pace of interest rate rises at the US central bank's most recent policy meeting, according to minutes from the Jan. 31-Feb. 1 FOMC meeting released on Wednesday.
But, they also stated that containing unacceptably high inflation will be the "key determinant" in determining how far rates need to climb.
After a wide advance on the back of the announcement, the dollar slowed its ascent on Thursday.
The euro rose modestly to $1.0608 on Thursday but remained close to a seven-week low of $1.0598 recorded the previous day.
Similarly, the Australian dollar recovered 0.15% to $0.6815 after plunging more than 0.7% on Wednesday, weighed down further by a failure in predictions for Australian wage growth in the previous quarter.
Trade was light on Thursday due to Japan's markets being closed for a holiday.
"The meeting minutes were very much in line with expectations... markets are now pricing on higher-for-longer rates," Tina Teng, market analyst at CMC Markets, said.
"The resiliency (of the US economy) pushes the Fed to continue raising interest rates... driving the US currency higher."
Sterling was steady at $1.2046 after falling 0.6% the previous session, while the New Zealand dollar advanced 0.1% to $0.6226.
The kiwi gained some support from the Reserve Bank of New Zealand's aggressive rate hike on Wednesday, as the central bank signaled additional tightening to combat rising inflation.
The US dollar index was at 104.50 against a basket of currencies, seeking to breach a more than one-month high of 104.67 sets last week.
"The Fed is expected to adhere to the majority view of 25bp increases, but the question is how long," said Macquarie analysts.
"We expect the response to be considerably more dependent on inflation statistics than on unemployment rate data, insofar as the Fed can always justify a low unemployment rate as a result of increased matching efficiency between businesses and employees looking to fill job opportunities."
The Japanese yen rose to 134.83 per dollar in Asia, with all eyes on new Bank of Japan (BOJ) Governor Kazuo Ueda's comments.
Ueda will testify in parliament on Friday and next Monday and might provide some hints as to when the BOJ's bond yield control program will be phased out.