Dollar jumps against riskier currencies on hawkish Fed minutes

The U.S. dollar index, which measures the currency against six major peers, edged up 0.08% to 96.259 after rebounding on Wednesday from intraday losses as steep as 0.44% following the release of the minutes.

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New York: The U.S. dollar jumped against risk-sensitive currencies including the Aussie and sterling on Thursday, as worries about faster policy tightening by the Federal Reserve dented market sentiment.

The greenback also remained close to a five-year high against the yen, supported by a surge in U.S. Treasury yields on rising bets for a U.S. rate hike by March.

Minutes from the Fed’s December meeting released on Wednesday were considered to be more hawkish than expected, weighing on riskier assets and supporting the U.S. dollar and bond yields.

The meeting minutes showed Fed officials said that a “very tight” job market and unabated inflation might require the Fed to raise interest rates sooner than expected and begin reducing its overall asset holdings – a process dubbed quantitative tightening (QT).

In the wake of that, futures on the federal funds rate priced in a roughly 80% chance of a quarter-percentage-point Fed hike by its March meeting.

Earlier in the day, the ADP National Employment Report showed private U.S. payrolls surged last month by more than double what economists polled by Reuters had forecast, potentially raising expectations for stronger non-farm payrolls numbers on Friday.

“With odds for a rate hike in March rising and the threat of QT this year, the USD should maintain resilient form,” TD Securities strategists wrote in a report.

“That should leave USDJPY supported over time, though we think a very hawkish Fed could cause some short-term indigestion for risk markets.”

The U.S. dollar index, which measures the currency against six major peers, edged up 0.08% to 96.259 after rebounding on Wednesday from intraday losses as steep as 0.44% following the release of the minutes.

The Aussie slid 0.68% to $0.7170, from as high as $0.7273 on Wednesday.

Sterling traded at $1.3526, having retreated overnight from the $1.3599 level — its highest in nearly two months – following the Fed minutes.

The euro stood at $1.1305 as it continued to consolidate in the middle of its trading range since mid-November.

Against Japan’s safe-haven currency, the greenback lost 0.2% to 115.87 yen, but remained not far from Tuesday’s peak at 116.355, its highest level since January 2017, buoyed by a spike in U.S. Treasury yields.

Despite increasingly hawkish language from the Fed over recent months, gains for the dollar index have stagnated since hitting a 16-month high at 96.938 in late November. The Fed in December signaled three quarter-point rate increases for this year.

“Trend and momentum dynamics continue to favor the USD, but prices will have to pierce the Q4 2021 highs in order to reassert the uptrends in most cases,” particularly against the euro, sterling and Australian dollar, George Davis, a strategist at RBC, wrote in a report.

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