SYDNEY- The dollar was firm on Wednesday after a rip higher in US yields vaulted it up sharply on the euro overnight, putting it back above support levels that have held for the past few months in anticipation of rising US interest rates.
The euro fell about 0.7 percent on Tuesday, its sharpest daily drop in a month, and is back on its 50-day moving average at $1.1323. Two-year Treasury yields have leapt 15 basis points over two sessions to cross 1 percent and benchmark 10-year yields stand at a two-year high of 1.8842 percent.
The dollar has also regained support levels against the Australian and New Zealand dollars and held sterling below its 200-day moving average.
The US Federal Reserve meets to set policy next week and traders are growing anxious about another hawkish surprise.
“A lot of (Fed) officials left us with hawkish impressions right before going quiet (ahead of the meeting),” NatWest markets’ strategist Jan Nevrusi said
“After (Tuesday’s) price action, there is slightly more than one hike priced in for the March meeting, and going into next week, I would imagine it oscillates within the lower end of the 25-50 basis point range.”
Fed funds futures are pricing three more hikes in 2022. Analysts say dollar strength could extend if traders start expecting rates to rise not just faster but further as well.
“We expect the US rate rethink – and this latest shift higher in yields reflects a push higher in the implied terminal rate, rather than just a faster pace of increases initially – to support the dollar in the first half of the year,” SocieteGenerale strategist Kit Juckes said. — Reuters
