Rate hike bets support the Dollar amid surging U.S. inflation

“If the Fed is to step hard on the monetary brakes, we would certainly favor the dollar against the low yielders backed by central bankers who have firmly placed themselves in the dovish camp,” said Chris Turner, global head of markets at ING.

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The dollar rose to an eight-day high on Friday after U.S. inflation surged to a 40-year peak and comments from a Federal Reserve official unleashed a wave of bets on aggressive rate hikes.

Meanwhile, the euro, which surged last week, was set for a weekly decline after European Central Bank President Christine Lagarde said in an interview that raising rates now would not bring down record eurozone inflation but only hurt the economy.

Data showed on Thursday that U.S. consumer prices rose 7.5% year-on-year in January, slightly higher than economists’ forecasts.

After that, St. Louis Fed President James Bullard told Bloomberg he’d like to see 100 basis points of hikes by July.

“If the Fed is to step hard on the monetary brakes, we would certainly favor the dollar against the low yielders backed by central bankers who have firmly placed themselves in the dovish camp,” said Chris Turner, global head of markets at ING.

The dollar rose against a basket of peers to its highest of 96.058 since Feb. 3 and was last up 0.1% at 95.917 at 0915 GMT. The euro was down 0.4% versus the dollar at $1.1383 after touching a three-month high the previous day.

Last week, Lagarde sent bond yields and the euro high by opening the door a crack to the first ECB rate hike in more than a decade in the face of stubbornly high price pressures, but she has since tried to temper surging expectations of aggressive ECB action.

Money market bets still imply a 10 bps ECB rate hike by June and a 50 bps increase by December.

For the Fed, rates futures have shifted to price in a better-than-two-in-three chance of a 50-bps hike next month and there is even chatter of an emergency hike. More than 160 bps of tightening is priced in by the end of the year.

Sterling was up 0.4% versus the euro at 83.96 pence, with markets pricing another 25-bps hike from the Bank of England next month.

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