The dollar advanced against all major peers Friday, with a gauge of the currency wiping out its losses for the year, on growing bets for more Federal Reserve rate hikes.
(Bloomberg) — The dollar advanced against all major peers Friday, with a gauge of the currency wiping out its losses for the year, on growing bets for more Federal Reserve rate hikes.
The Bloomberg Dollar Spot Index climbed as much as 0.6% on Friday, poised for a third weekly gain. Real money has bought the dollar this week in size, 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 Federal Reserve officials have led investors to rethink the outlook for rates, boosting the appeal of the dollar. Traders are now expecting around 73 basis points of additional hikes by July, from 62 at the end of last week.
“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.
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.
For HSBC, the greenback’s rally 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.”
–With assistance from Marcus Wong and Vassilis Karamanis.
(Updates with context and comments throughout.)
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