Another week of gains for the dollar is putting the US currency close to erasing its 2023 losses amid growing bets for more Federal Reserve rate hikes.
The Bloomberg Dollar Spot Index is now poised for its third weekly gain — the longest winning streak since September. Real money has bought the currency this week — mainly against the euro and the yen, according to Europe-based traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.
Stronger US economic data and hawkish comments from Fed officials have led investors to rethink the outlook for rates, boosting the appeal of the dollar. Traders are now expecting around 68 basis points of additional hikes by June, from 59 at the end of last week, according to data compiled by Bloomberg.
“Strong US cyclical and inflation data have investors finally coming around to the idea the Fed is correct and that rates will have to go significantly higher,” said David Forrester, senior FX strategist at Credit Agricole CIB in Singapore.
The dollar index was little changed Friday, still gaining 0.5% in the week.
Richmond Fed President Thomas Barkin said that he favors a 25 basis-point step in rate increases as it gives policy makers “the flexibility to respond.” Fed Governor Michelle Bowman said that inflation remains “much too high” and the officials need to continue raising rates until they see more progress.
On Thursday, two of the Fed’s most hawkish policymakers signaled they may favor returning to bigger rate hikes in the future to vanquish inflation. Data showed producer prices rebounded in January by more than expected, underscoring persistent inflationary pressures which are increasing expectations of peak Fed rates.
“The momentum in FX points to data like this as having a clear impact on driving the dollar further stronger,” Derek Halpenny, head of research for global markets at MUFG in EMEA, wrote in a note to clients.
This is a wake up call on a widely-held bearish view on the dollar, according to Viraj Patel, strategist at Vanda Research in London. Investors had placed too much emphasis on a dovish Fed pivot and global growth outperforming the US, he said, leading the greenback to decline more than 2.5% earlier this year.
“Markets have recalibrated the Fed terminal rate given the stronger data of late and rightly so,” said Bipan Rai, a currency strategist at Canadian Imperial Bank of Commerce. “Hikes will still end closer to late spring and Fed pauses, so the more important strategic theme is still bearish dollar over the medium term.”
For HSBC, the greenback’s rally also won’t last long. Strategists at the firm anticipate a renewed “flop” toward the second quarter as uncertainties, including over the Fed’s hiking path, subside.
RBC BlueBay Asset Management, in the meantime, has favored using the dollar’s rebound to add to long positions on the Japanese yen, which fell to its lowest level against the greenback since December on Friday.
“We’ve had a reality check that the Fed might not be much more dovish than other central banks this year,” said Vanda’s Patel. “We’re getting to dollar levels that are a fair reflection of where the US macro outlook is.”
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Karl Lester M. Yap, Ruth Carson, Libby Cherry
