The dollar strengthened on Wednesday, lifted by rising Treasury yields, although the pound edged higher against the greenback after British inflation topped 10 percent in March and put further pressure on the Bank of England to raise rates.
The dollar index, which tracks the currency against a basket of its peers, was up 0.206 percent as markets grew more skeptical that the Federal Reserve would cut rates later this year.
The yield on two-year Treasury notes rose 7 basis points to 4.269 percent after hitting a one-month high of 4.286 percent, sensitive to expectations of the US central bank’s monetary policy.
But the dollar gain was a “temporary respite,” said Bipan Rai, North America head of FX strategy at CIBC Capital Markets in Toronto.
“We still think the dollar will continue to come under considerable pressure over the medium to long term. And that’s tied to our view that the Fed is probably going to hike one more time and then that’s it.”
When policymakers conclude their two-day meeting on May 3, futures pricing shows an 85.7 percent chance the Fed will hike rates by 25 basis points, according to the CME’s FedWatch tool. But the prospect of a rate cut until December has waned significantly this week.
Rai said the dollar has been on the defensive for some time, the debt ceiling is unresolved in Congress and flight of deposits into the US banking system is still a concern.
Sterling was last trading at $1.244, up 0.13 percent on the day, while the dollar rose 0.46 percent against the rate-sensitive yen at 134.71 after poking above 135 for the first time in a month.
Joe Manimbo, senior market analyst at Konevera in Washington, said the immediate outlook for the dollar is increasingly bearish, with central banks overseas expected to do more hiking than the Fed through the remainder of the year.
“If core inflation takes longer to return to the Fed’s 2 percent target, the Fed may have to raise rates more than once during the year,” he said.
“We are in a very volatile position for FX right now until we get some greater clarity on the policy outlook.”
The expectation of higher official rates in the market than elsewhere generally pulls money markets and government bond yields higher, drawing cash into the country while boosting its currency, at least in the short term.
Wednesday’s data showed British consumer price inflation eased to a lower-than-expected 10.1 percent in March from 10.4 percent in February, meaning Britain has Western Europe’s highest rate of consumer inflation.
“It looks like the UK’s 10 per cent+ CPI reading was the culprit. This has revived concerns that interest rates in the UK and Europe will remain high for a long time,” said Fawad Razakzada, market analyst at City Index.
Deutsche Bank revised forward expectations for British rates on Wednesday to include two more 25 basis point rate hikes from the Bank of England. Morgan Stanley now predicts one, with a risk of a second.
Currency Quote Price 2:42 PM (1842 GMT)
Details RIC Last US Close PCT Change YTD PCT High Bid Low Bid
last change
Session
Dollar Index 101.9200 101.7200 +0.21 percent -1.517 percent +102.2300 +101.6500
Euro/Dollar $1.0958 $1.0974 -0.15 percent +2.26 percent +$1.0984 +$1.0918
USD/JPY 134.7050 134.1000 +0.44 percent +2.73 percent +135.1300 +133.9600
EUR/JPY 147.61 147.17 +0.30 percent +5.21 percent +147.8600 +147.0500
Dollar/Swiss 0.8974 0.8962 +0.16 percent -2.93 percent +0.9002 +0.8959
Sterling/Dollar $1.2440 $1.2425 +0.14 percent +2.88 percent +$1.2474 +$1.2393
Dollar/Canadian 1.3456 1.3388 +0.51 percent -0.69 percent +1.3458 +1.3386
Aussie/Dollar $0.6716 $0.6729 -0.17 percent -1.46 percent +$0.6741 +$0.6690
Euro/Swiss 0.9834 0.9831 +0.03 percent -0.62 percent +0.9848 +0.9826
Euro/Sterling 0.8806 0.8831 -0.28 percent -0.43 percent +0.8838 +0.8792
NZ dollar/dollar $0.6204 $0.6206 -0.06 percent -2.32 percent +$0.6225 +$0.6174
Dollar/Norway 10.5690 10.4730 +1.02 percent +7.81 percent +10.5840 +10.4820
Euro/Norway 11.5779 11.4795 +0.86 percent +10.33 percent +11.5960 +11.4735
Dollar/Sweden 10.3422 10.3135 +0.13 percent -0.63 percent +10.3750 +10.3008
Euro/Sweden 11.3277 11.3132 +0.13 percent +1.60 percent +11.3362 +11.3029
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