The dollar fell on Monday, posting its biggest one-day drop since November, as investors consolidated gains after hitting 1-1/2-year highs on Friday on expectations the Federal Reserve will accelerate the pace of interest rate hikes.
With the Federal Reserve making clear last week that it intends to raise rates as early as its March 15-16 policy meeting, Wall Street banks now expect five to seven rate hikes this year.
Fed funds futures priced in less than five rate hikes in 2022, or about 121 basis points of tightening, late Monday. They also showed a 17% chance of a 50 basis point rate hike in March, down from 32% on Friday.
Atlanta Fed President Raphael Bostic, a non-voter on the Federal Open Market Committee, said in an interview with the Financial Times over the weekend that if inflation remains high , the Fed may extend the rate hike to half a percentage point.
The dollar index fell 0.7% on the day, its best one-day percentage gain in two months. In January, the dollar gained nearly 1%.
“The dollar’s dominance is largely priced in as the Fed now appears poised to raise rates 5-7 times this year,” Edward Moya, senior market analyst at OANDA, wrote in a research note.
He added that the dollar could start to “underperform compared with advanced economies that have become more aggressive in tightening policy.”
Investors are also eyeing Friday’s U.S. nonfarm payrolls data for the Federal Reserve’s positivity in tightening policy. U.S. jobs are expected to increase by 153,000 jobs in January, down from 199,000 in December, with the unemployment rate steady at 3.9 percent, according to a Reuters poll. [EM]
“The dollar appears to have peaked for now, as Friday’s jobs report is expected to show another month of tepid hiring,” said Joe Mannybo, senior market analyst at Western Union Business Solutions in Washington.
The faster pace of rate hikes is also seen as dampening future growth expectations, as is the case in bond markets, where the spread between 2-year and 10-year U.S. Treasury yields fell below 59 basis points for the first time since early November. It is a phenomenon known as “flattening a bear market”. [we/]
Among other currencies, the Australian dollar led gains, rising 1% to $0.7068 ahead of the Reserve Bank of Australia’s policy meeting on Tuesday.
USD/JPY was down 0.2% at 115.045 yen.
The Bank of England will also hold a policy meeting on Thursday, with the Bank of England set to raise interest rates for the second time in less than two months after British inflation rose to its highest level in nearly 30 years, a Reuters poll showed.
Sterling was last up 0.4% at $1.354
The European Central Bank is also meeting on Thursday. While no change in policy is expected, analysts said the imminent Fed rate hike would narrow the ECB’s window for action.
The euro was last up 0.8% at $1.1240, its biggest one-day percentage gain in two months.
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