Dollar girded by bets on a US hiking cycle

SINGAPORE: The dollar was hanging on to recent gains on ​Wednesday and trading near multi-week highs on a handful of major peers ahead of a Federal Reserve decision where traders expect ‌the first of what could be several US interest rate hikes.

“A 25 basis-point increase is about 90% priced, implying the dollar will receive a modest boost if the Fed increases,” said Carol Kong, currency strategist at the Commonwealth Bank of Australia in Sydney.

“There is a small chance the dollar eases if the (Fed) hikes but (chair Kevin) Warsh plays ​down the risk of follow-up hikes in the press conference. In the event the Fed does not increase the funds rate, we ​expect a steep 1%+ fall in the dollar.”

The dollar had advanced along with yields overnight, running furthest against the ⁠yen and New Zealand dollar, leaving the kiwi to hit a two-month low of $0.5749 in Asia morning trade and the yen at a one-week ​low of 155.43 per dollar.

At $1.1535 the euro was not far from Monday’s one-month low of $1.1523, while sterling , at $1.3470, was not far above a six-week ​trough of $1.3464 it had made on Monday.

The Aussie dollar steadied at $0.7126.

Currency markets haven’t really moved that much while global bond yields have been climbing in concert over recent weeks because sovereign bonds have moved in tandem and not shifted relative differences between countries’ yields very far.

But the dollar’s gained traction in the last few sessions on thinking that ​despite Warsh being hired by President Donald Trump to cut interest rates, he’ll need to hike a few times to show the Fed is ​serious about taming inflation that is being fanned by war with Iran and the resulting energy price surge.

“Especially given that the Fed has lost a bit of ‌credibility with ⁠the markets, we are a bit sceptical that one or even two hikes are going to be enough to restore that credibility,” said Calvin Tse, head of US strategy and economics at BNP Paribas.

Yen test

The exceptions to the broad steadiness in foreign exchange are mostly in Asia and the Fed decision should also be a big one for the yen.

The yen is in the midst of its most promising rally for months on a combination of ​a hawkish shift in expectations for ​Japanese interest rates, joint intervention by ⁠Japan and the U.S. and talk of Japanese investors repatriating capital.

Traders see an 80% chance the Bank of Japan hikes rates on Friday, according to LSEG data, and have priced in two 25-basis-point hikes by the end ​of January.

“The yen’s path will continue to depend heavily on interest rate differentials,” said David A. Meier, economist ​at Julius Baer in ⁠a research note.

“We recently revised our USD/JPY forecasts to 155, reflecting some scepticism that the central bank can ultimately satisfy the pace of tightening currently priced in by markets,” he said.

“Many uncertainties remain, including the political preference for low interest rates amid ongoing fiscal expansion.”

South Korea’s won, which has ripped more than ⁠15% higher ​on the dollar since the end of June on a wave of repatriated capital ​and profits generated by chipmaking giants, and China’s steadfast yuan are the other regional standouts.

A long rally in the yuan has lost momentum at around 6.71 to the dollar, but it’s holding ​its gains despite the gap widening between low Chinese yields and rates in the rest of the world.