SINGAPORE: The dollar took center stage on Thursday after Federal Reserve Chairman Jerome Powell signaled that U.S. rates were likely to rise more than expected, disappointing traders’ hopes of a change in tone and displacing the pay attention to Friday’s employment data.
The dollar hit a weekly high of $0.9810 per euro at the start of trade in Asia and is looking at its best week in more than a month, although a Bank of England meeting and labor data in United States looms ahead of the close of trade in New York on Friday.
The Fed raised its benchmark funds rate by 75 basis points to 3.75-4% as widely expected.
The dollar initially fell on hints in the Fed’s statement of small hikes ahead, but it came after Powell’s hawkish stance on the path of rates.
“Data received since our last meeting suggests that the ultimate level of interest rates will be higher than expected,” Powell told reporters, adding, “It’s very premature to think about pausing…we’ve had to way to go.”
The dollar’s gains took its New Zealand counterpart from a six-week high and back below its 50-day moving average at $0.5890. The Australian dollar fell 0.7% overnight and slipped further to a weekly low of $0.6332 on Thursday.
Dollar drops as Fed decision looms, yen and real gain
“The Fed Chairman’s strong hawkish messages are pouring cold water on premature dovish pivot expectations,” said Citi analysts, who recommend going long on the U.S. dollar in Asia.
“This will further reinforce expectations of policy divergence with a much more hawkish Fed compared to other central banks around the world.
A further tightening of financial conditions will put downward pressure on risky assets and strengthen the dollar. The Japanese yen was particularly firm against dollar gains and held at 147.90 to the dollar, prompting speculation of possible help from official intervention.
Japan spent a record $42.8 billion to prop up the yen last month via a series of unannounced yen purchases, on top of the nearly $20 billion spent in September.
Japanese markets were closed for a public holiday on Thursday, reducing Asian currency trading. The pound fell 0.8% against the dollar overnight to settle at $1.1378 in early trading on Thursday.
Markets expect the BoE to make its biggest hike since 1989 and raise interest rates by 75 basis points later today.
“The risk is that the BoE maintains the current pace of tightening and offers a 50 basis point hike,” said Commonwealth Bank of Australia analyst Kim Mundy. “A 50 basis point rise would be considered ‘dovish’ by market participants and could push the pound down.” The US dollar index stood at 112.13, its highest in seven sessions.
The Chinese yuan was hovering near record highs in offshore trade at 7.3408 to the dollar, and other Asian currencies were under pressure.