US dollar continues to garner support from Fed hike expectations

19 Apr, 2022

NEW YORK: The dollar edged higher on Monday in thin and choppy trading, in line with higher US Treasury yields as investors braced for multiple half a percentage-point rate hikes this year from the Federal Reserve.

Volume was light on the day with Hong Kong, European, and Australia, and New Zealand markets closed for Easter Monday.

The dollar index, a gauge of the greenback’s value against six major currencies, rose 0.1% to 100.61. Late last week, the index hit its highest in two years.

“There is indeed history that when the Fed plans for hiking and tightening, the buck ends up losing during those cycles, but at the moment there is little in optimism out there that can knock the buck down,” said Juan Perez, director of FX trading at Monex USA in Washington.

“Better headlines in terms of ports not being shut down is what is needed for global currency momentum and currently there is none,” he added.

The US rate futures market has priced in 96% chance of a 50 basis-point hike at next month’s Fed policy meeting, and about 215 basis points in cumulative rate increases.

The US currency also hit a fresh two-decade high versus the yen overnight, but won a brief reprieve from Japanese policymaker comments on Monday, even as holidays confined the US dollar to narrow ranges against most other currencies.

The yen fell to a two-decade low of 126.795 in early Asian trading, before both Bank of Japan Governor Haruhiko Kuroda and Finance Minister Shunichi Suzuki voiced concerns and caused it to bounce as far as 126.25. But the rally proved short-lived and it last at 126.58, little changed on the day.

At Monday’s lows, the yen was nearly 10% weaker than where it was at the beginning of March. It fell nearly 2% against the dollar last week, marking a sixth straight losing week.

Win Thin, head of currency strategy at BBH Global Currency Strategy, said the dollar did not seem to have significant chart points halting a potential further run-up against the yen until a 2002 high near 135.15.

“We see low risk of FX intervention. Until the BoJ changes its ultra-dovish stance, the monetary policy divergence argues for continued yen weakness and intervention would likely have little lasting impact,” Thin wrote.

Japanese policymakers have been vocal about their concerns around the falling yen, particularly after it slipped to the weaker side of 125 per dollar on April 11.

The dollar stayed close to a two-year high versus the euro, supported by the unremitting hawkish comments from Fed officials.

The euro, hamstrung by a lack of clarity on when rates in the euro zone would rise, was down 0.1% at $1.0801, just off last week’s low of $1.0758, a level unseen since April 2020.

In other currencies, the Australian dollar dropped to its lowest in a month and was last down 0.3% at US$0.7368. Cryptocurrency bitcoin traded below the $40,000 mark, last changing hands at $39,452, down 0.6%.

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