Dollar finds footing as traders brace for hawkish Fed

The dollar clung to a late week bounce on Monday as investors braced for Januarys U.S. Federal Reserve meeting and raised bets it will chart a year ahead containing several rate hikes, while China cut borrowing costs to support a stuttering economy.

A Bank of Japan meeting which concludes on Tuesday, British inflation data on Wednesday and Australian jobs figures on Thursday are also in view as traders gauge the global policy outlook.

An unexpected cut to some key lending rates in China highlighted it as the outlier, though it only briefly weighed on the yuan.

The dollar was 0.3% higher at 114.47 yen late in the Asia session, about 0.8% above a Friday low. It also edged a fraction firmer on the euro to $1.1421.

The moves follow a jump in yields and the dollar on Friday and underscore support for the greenback from the hawkish rates outlook, even if momentum for gains has started to wane.

The U.S. dollar index, which declined sharply last week until Fridays leap, sat at 95.225 in Asia on Monday.

“Friday‘s move suggests to me that the interest rate driver for dollar strength is not dead and buried,” said National Australia Bank’s head of foreign exchange strategy Ray Attrill.

He said it may not necessarily return to drive new dollar highs, but reckoned traders were on guard. “Weve had a hawkish twist out of every Fed meeting since June last year,” he said.

The Fed meets Jan. 25-26 and is not expected to move rates, but there is a growing drumbeat of hawkish comments coming from within and outside the central bank.

Last week, J.P. Morgan CEO Jamie Dimon remarked that there could be “six or seven” hikes this year and 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 cash Treasury market was closed for a holiday on Monday but 10-year futures were sold to a two-year low in Asia and Fed funds futures fell, reflecting a strengthening conviction in the market of at least four hikes in 2022.

GLOBAL HIKES LOOM; CHINA CUTS

Tugging against dollar gains is momentum for tightening almost everywhere else too, with Reuters reporting last week that even the ultra-accommodative Bank of Japan is debating how soon to begin telegraphing hike plans.

Inflation data on Wednesday could also help extend a month-long rally in sterling after it stalled around its 200-day moving average last week. It held at $1.3669 on Monday.

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

“A quicker pace of inflation could see pricing move closer to 100%.”

The outlier is China, where growth data on Monday confirmed coronavirus restrictions were dragging on consumption and policymakers also announced a surprise cut to borrowing costs.

The Peoples Bank of China (PBOC) said it was lowering the interest rate on $110 billion worth of one-year medium-term loans by 10 basis points, surprising analysts who now reckon it is a harbinger of more to come.

“We could see more and that may, over time, help to stabilise the Chinese economy and that might be supportive of the commodity currencies,” said Bank of Singapore strategist Moh Siong Sim.

The yuan initially faded slightly as government bonds rallied on the rate cut, before firming about 0.1% to 6.3450 per dollar. [CNY/]

The Australian and New Zealand dollars, which dropped sharply on Friday, remained under pressure. The Aussie hovered around Fridays low at $0.7200 and the kiwi around $0.6798. [AUD/]

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Currency bid prices at 0602 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar

$1.1419 $1.1417 +0.02% +0.44% +1.1425 +1.1401

Dollar/Yen

114.4650 114.2250 +0.22% -0.47% +114.5050 +114.2800

Euro/Yen

130.70 130.36 +0.26% +0.29% +130.7600 +130.3200

Dollar/Swiss

0.9143 0.9140 +0.01% +0.21% +0.9158 +0.9141

Sterling/Dollar

1.3674 1.3685 -0.08% +1.11% +1.3681 +1.3665

Dollar/Canadian

1.2544 1.2557 -0.12% -0.80% +1.2555 +1.2536

Aussie/Dollar

0.7202 0.7218 -0.20% -0.91% +0.7224 +0.7196

NZ

Dollar/Dollar 0.6797 0.6810 -0.19% -0.69% +0.6820 +0.6788

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ