Dollar slides as recent rally takes a pause, may have seen short-term peak

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) -The U.S. dollar fell on Monday, posting its largest daily fall since last November as investors consolidated gains after hitting a 1-1/2-year high on Friday on expectations of a faster pace of rate hikes by the Federal Reserve.

With the Fed clearly signalling last week that it intends to raise interest rates as early as the March 15-16 policy meeting, Wall Street banks are now expecting are now expecting about five to seven rate hikes this year.

Fed funds futures late Monday have priced in just under five hikes for 2022, or about 121 basis points of tightening. They also showed a 17% chance of a 50 basis-point increase in March, down from as high as 32% on Friday.

Atlanta Fed President Raphael Bostic, a non-voter on the Federal Open Market Committee told the Financial Times in an interview over the weekend the Fed could super-size a rate increase to half a percentage point if inflation remains stubbornly high.

The dollar index slid 0.7% on the day, its highest daily percentage rise in two months. For January, the greenback was up nearly 1%.

“Dollar dominance has been mostly priced in as the Fed now seems poised to deliver 5-7 rate hikes this year,” wrote Edward Moya, senior market analyst, at OANDA, in a research note.

The dollar could start to see “some underperformance against advanced economies that grow more aggressive in tightening,” he added.

Investors are also looking to Friday’s U.S. nonfarm payrolls for an indication of how aggressive the Fed can be on its tightening path. U.S. payrolls are forecast to show a gain of 153,000 jobs for January, down from 199,000 in December, with the unemployment rate holding steady at 3.9%, according to a Reuters poll. [EM]

“The buck appears to have peaked for now as Friday’s jobs report is forecast to show another month of tepid hiring,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

A quicker pace of rate hikes is also seen as dampening future growth expectations, a scenario playing out in bond markets where spreads between 2-year and 10-year U.S. Treasury yields fell below 59 basis points for the first time since early November, a phenomenon known as “bear-flattening.” [US/]

In other currencies, the Australian dollar led gains, rising 1% to US$0.7068 before a Reserve Bank of Australia policy meeting on Tuesday.

Against the yen, the dollar fell 0.2% to 115.045 yen.

The Bank of England also holds its policy meeting on Thursday, with a Reuters poll predicting a second rate hike in less than two months after UK inflation jumped to its highest in nearly 30 years.

Sterling was last up 0.4% at $1.354

The European Central Bank also meets on Thursday. While no policy change is expected, analysts said the Fed’s looming rate hikes will narrow the ECB’s window for action.

The euro last traded up 0.8% at $1.1240, its best daily percentage gain in two months.

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Currency bid prices at 3:53PM (2053 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 96.5840 97.1890 -0.61% 0.963% +97.2580 +96.5120

Euro/Dollar $1.1237 $1.1147 +0.81% -1.16% +$1.1248 +$1.1139

Dollar/Yen 115.0700 115.2400 -0.13% -0.03% +115.5900 +114.9200

Euro/Yen 129.31 128.45 +0.67% -0.78% +129.3700 +128.4600

Dollar/Swiss 0.9264 0.9311 -0.50% +1.57% +0.9342 +0.9252

Sterling/Dollar $1.3453 $1.3401 +0.41% -0.51% +$1.3460 +$1.3389