U.S. dollar rises, but off near two-year peak amid hawkish Fed signals

NEW YORK (Reuters) – The U.S. dollar climbed to nearly two-year highs on Thursday, as investors digested hawkish signals from the Federal Reserve, but wondered whether the currency’s value already reflected further tightening moves.

The dollar index hit 99.823 on Thursday, the highest since late May 2020. It was last up 0.2% at 99.810.

“With traders pricing in more than 225 basis points of interest rate hikes over the rest of this year, there’s certainly more risk of the Fed failing to meet expectations than exceed them,” said Matthew Weller, global head of research at FOREX.com and City Index.

“The greenback’s uptrend has begun to falter against some of its commodity-correlated rivals, but until the euro and yen can find a floor the path of least resistance for the dollar index remains to the topside,” he added

St. Louis Fed President James Bullard, a voter this year on the Federal Open Market Committee and a known hawk, continued to sound the alarm on inflation on Thursday.

He said the Fed remains behind in its fight against inflation despite increases in mortgage rates and government bond yields that have raced ahead of actual changes in the central bank’s target federal funds rate.

Bullard’s comments, however, had little impact on the dollar.

Chicago Fed President Charles Evans and Atlanta Fed President Raphael Bostic, neither of whom are voters in 2022, on Thursday supported rate increases, but provided a somewhat dovish counterpoint.

The dollar gained on Wednesday after minutes from the March Fed meeting showed “many” participants were prepared to raise interest rates in 50-basis-point increments in coming months.

The Fed also said it will reduce the Fed’s balance sheet after the May meeting at a rate of $95 billion per month, the beginning of the reversal of the massive stimulus it pumped into the economy during the pandemic.

The euro, on the other hand, hit a one-month trough against the dollar at $1.0871, but was last down 0.2% at $1.0875.

European Central Bank policymakers appeared keen to unwind stimulus at their March 10 meeting, with some pushing for even more action, as conditions for raising rates had either been met or were about to be met, minutes of the ECB meeting showed on Thursday.

A seemingly tight presidential election in France is another wild card, and the prospect of far-right candidate Marine Le Pen beating incumbent Emmanuel Macron has weighed on the euro and French debt ahead of Sunday’s first-round vote.

The Australian and New Zealand dollars fell 0.3% versus the greenback, as the Fed’s tone offset a hawkish shift from Australia’s central bank, while a pullback in commodity prices also reversed some of their recent strength.

Against the yen, the dollar rose 0.2% to 123.990.

========================================================

Currency bid prices at 3:37PM (1937 GMT)

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

Previous Change

Session

Dollar index 99.7900 99.6370 +0.16% 4.314% +99.8330 +99.3900

Euro/Dollar $1.0873 $1.0895 -0.21% -4.37% +$1.0936 +$1.0865

Dollar/Yen 123.9850 123.7850 +0.17% +7.71% +123.9950 +123.4650

Euro/Yen 134.81 134.85 -0.03% +3.45% +135.5000 +134.4300

Dollar/Swiss 0.9341 0.9327 +0.19% +2.44% +0.9348 +0.9319

Sterling/Dollar $1.3069 $1.3069 +0.02% -3.35% +$1.3106 +$1.3053