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Dollar hovers near 16-month high with rate expectations in focus

The U.S. dollar eased off of a fresh 16-month high on Wednesday, while the euro remained on its back foot as investors weighed central bank tightening odds amid rising pricing pressures, with the U.S. Federal Reserve seen hiking rates as early as mid-2022.

The dollar index, which measures the currency against a basket of six rivals, drifted 0.034% lower to 95.91 after earlier touching 96.266 for the first time since mid-July 2020.

Versus the yen, the greenback hit a 4-1/2 year high and tested the $1.12 levels against the euro, helped by robust U.S. retail sales data and hawkish comments from Fed policymakers.

Money markets are now pricing in a high probability of a Fed rate increase in June, followed by another in November. CME data suggest a 50% probability of a 25 bps rate hike by July 2022.

U.S. retail sales rose more than expected in October, a report showed on Tuesday, adding to the dollar’s momentum from last week when a report showed U.S. consumer prices rising at the highest rate since 1990.

Data on Wednesday showed inflation in October hit a 10-year high in Britain and an 18-year high in Canada.

The pound climbed to a one-week high versus the dollar and a 21-month high against the euro after the British data, which boosted expectations of a rate hike by the Bank of England as early as next month.

The greenback rose as far as 114.975 yen, its highest since March 2017 before retreating to 114.55 yen.

The euro was last down 0.12% at $1.13065.

The dollar’s rise has also pushed broader FX market volatility higher, with one gauge rising to a 8-month high of nearly 7%.

 

TREASURIES-Yields fall as buyers step in, tepid demand for 20-year auction

U.S. Treasuries rallied on Wednesday as the recent backup in yields reached levels that drew buyers back to the securities, and after the Treasury sold 20-year bonds to tepid but not terrible demand.

Benchmark 10-year yields reached 1.65%, the highest since Oct. 26, before reversing and falling back to 1.61%. They have increased from a low of 1.42% last week, before data showed that U.S. consumer prices posted their biggest gain in 31 years in October.

 

Reference: CNBC, Reuters