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Powell's warning on higher US rates pushes dollar to 3-month high
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Banknotes of Chinese yuan and US dollar are shown in this illustration picture taken on Sept. 29, 2022. (Reuters/Florence Lo)
T
he dollar scaled multi-month highs against most other major currencies on Wednesday after Federal Reserve Chair Jerome Powell warned that US interest rates might need to go up even faster and higher than expected to rein in stubborn inflation.
Higher rates benefit the dollar by improving its yield and as traders look for safety while global stock markets drop.
In the Asia session the greenback broke above its 200-day-moving average against the yen for the first time this year, rising as far as 0.5 percent to a nearly three month high of 137.79 yen.
The dollar hit a two-month high of $1.0528 to the euro, extending Tuesday's 1.2 percent jump. Sterling, the Swedish and Norwegian crowns, the Chinese yuan and the Canadian, Australian and New Zealand dollars all made multi-month lows.
Powell told lawmakers on Capitol Hill on Tuesday that recent US economic data was stronger than expected and so the speed and size of future hikes may also need to increase, which sent short-term US rate expectations surging.
Powell is back for more testimony from 1500 GMT. Ahead of that is an appearance from European Central Bank head Christine Lagarde at 1000 GMT and, at 0930 GMT a speech from Bank of England committee member Swati Dhingra.
The Canadian dollar – last at 1.3772 to its US counterpart and down more than 1 percent since Monday – may face further pressure if Canada's central bank holds rates steady later in the day, as expected.
"If the Fed follows through and hikes by 50 basis points in March, and even more likely the Bank of Canada strikes the pause button, the gap [...] is consistent with USD/CAD heading up to 1.40 or even slightly beyond," said Deutsche Bank strategist Alan Ruskin.
The Australian dollar has weakened for a similar reason as the Reserve Bank of Australia has softened its tone. Having dropped 2 percent on Tuesday, the Australian dollar weakened a bit more a four-month low of $0.6568 on Wednesday.
Powell's remarks also sent short-term rate expectations higher, with traders now anticipating an almost 70 percent chance of a 50 basis point US rate hike in March, according to CME's FedWatch tool, up from about a 30 percent chance a day earlier.
Futures imply US rates peaking above 5.6 percent and holding higher than 5.5 percent through 2023. Traders have a laser focus on Friday's US payrolls data and next week's inflation figures.
"If those data prints exceed expectations at all, based on what Powell said that'd pretty much guarantee a 50-basis point hike in March," said IG Markets analyst Tony Sycamore in Sydney.
"If the hot data continues to roll into February and March, the US dollar is going to have a very firm tailwind behind it."
The US dollar index rose 0.2 percent in Asia trade to a more than three-month high of 105.86. Sterling fell marginally to $1.1811, its lowest since late November.
China's yuan hit a more than two-month low of 6.9782, just steps away from the eye-catching 7-per-dollar level.
