Dollar finds a footing as traders brace for hawkish Fed

Illustrative photo of the US dollar, Swiss franc, British pound and euro banknotes, taken in Warsaw on January 26, 2011. REUTERS/Kacper Pembel/File Photo

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  • The dollar maintains Friday’s jump in Asia
  • Rebound extends to 114.45 yen; Federal Funds Futures Drops
  • China offers surprise 10 basis points cut in MLF

SYDNEY (Reuters) – The dollar clung to a late-week rebound on Monday as investors prepared for the US Federal Reserve’s January meeting and raised bets that next year it would plan several rate hikes, while China surprised analysts with its record cut.

Chinese economic growth data, due later on Monday (0200 GMT), the Bank of Japan monetary policy meeting concluding on Tuesday, UK inflation data on Wednesday and Australian jobs numbers on Thursday are also under consideration as traders gauge the global policy outlook.

The dollar rose 0.2 percent to 114.45 yen early in the Asian session, up 0.8 percent from its lowest level on Friday. It also rose by 0.1% on the euro to $1.1403.

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The moves follow the dollar’s jump on Friday along with US yields and underline support for the greenback from the hawkish interest rate outlook, even if the gains momentum begins to fade.

The US dollar index, which fell sharply last week until Friday’s jump, settled at 95.225 in Asia on Monday.

“Friday’s move suggests to me that the interest rate driver of a stronger dollar is neither dead nor buried,” said Ray Atrell, head of foreign exchange strategy at National Australia Bank.

He said it might not necessarily come back to drive new highs for the dollar, but added: “We’ve seen a hawkish shift at every Federal Reserve meeting since June of last year.”

The Federal Reserve meets January 25-26 and is not expected to move interest rates, but there is a growing drumbeat of hawkish comments coming from both inside and outside the central bank.

Last week, JP Morgan CEO Jamie Dimon suggested there could be “six or seven” hikes this year and that billionaire hedge fund manager Bill Ackman floated on Twitter over the weekend the possibility of an initial 50 basis point hike to tame inflation.

The Treasury cash market was closed for a holiday on Monday but 10-year futures were sold to their lowest level in two years and Fed fund futures were also down, reflecting strong market conviction of at least four hikes in 2022.

The Australian and New Zealand dollars, which fell sharply on Friday, remained under pressure on Monday. The Australian dollar recently fell 0.2% to $0.7200, currently ending a short break above the resistance around $0.7276.

The kiwi was down 0.2% at $0.6791.

In China, bonds surged and the yuan fell after the central bank cut borrowing costs for medium-term loans for the first time since April 2020, in defiance of market expectations. Read more

Ten-year government bond futures rose to their highest levels since June 2020 after the move and the internally traded yuan began marginally softer at 6.3555 per dollar.

Chinese GDP figures due at 0200 GMT are expected to show annual growth at the slowest level in 18 months as demand weakens due to sluggish real estate.

Elsewhere, sterling’s month-long rally around the 200-day moving average faded away. It settled at $1.3669 on Monday, but analysts say it may resume gains if inflation data shows the case for higher interest rates.

“Rate markets are currently pricing in an 80%+ chance of a 25bp rate hike by the BoE on February 3,” said Joe Capurso, strategist at Commonwealth Bank of Australia.

“An acceleration in inflation could bring prices closer to 100%.”

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Currency display prices at 0139 GMT

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locations in Tokyo

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Tokyo forex market information from the Bank of Japan

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Reporting by Tom Westbrook. Editing by Jacqueline Wong

Our Standards: Thomson Reuters Trust Principles.

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