© Reuters. FILE PHOTO: US dollar banknotes are shown in this illustration taken on February 14, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
Written by Herbert Lash and Elon John
NEW YORK/LONDON (Reuters) – The dollar rose on Wednesday, supported by higher Treasury yields, although the pound strengthened against the dollar after British inflation remained above 10% in March and put more pressure on the Bank of England to continue raising interest rates.
The currency index, which tracks the currency against a basket of peers, rose 0.206% as markets became more skeptical that the Federal Reserve will cut interest rates later this year.
The yield on two-year Treasury notes, which is influenced by the US central bank’s monetary policy outlook, rose 7 basis points to 4.269%, after hitting a one-month high of 4.286%.
Bipan Rai, head of North American forex strategy at CIBC Capital Markets in Toronto, said the dollar’s gains were a “temporary reprieve.”
“We continue to believe that in the medium to long term, the dollar will continue to experience significant amounts of pressure. That is tied to our view that the Fed will probably hike again and then that’s it.”
Futures pricing shows an 85.7% chance that the Fed will raise interest rates by 25 basis points when policymakers wrap up a two-day meeting on May 3, according to CME’s FedWatch tool. But the possibility of a rate cut by December has reduced significantly this week.
Al-Rai said the dollar had been on the defensive for some time with the debt ceiling not resolved in Congress and the migration of deposits in the US banking system still a concern.
The pound was last trading at $1.244, up 0.13% on the day, while the dollar was up 0.46% against the interest rate-sensitive yen at 134.71, after it rose briefly above 135 for the first time in a month.
The immediate outlook for the dollar is less than bullish given that offshore central banks have more strolling throughout the year than the Federal Reserve, said Joe Manimbo, a senior market analyst in Convera, Washington.
“If core inflation takes longer to return to the Fed’s 2% target, the Fed may have to raise interest rates more than once over the course of the year,” he said, adding that that could stop or slow the dollar’s decline.
“We’re in a very choppy state right now for foreign exchange until we get a little more clarity on the policy outlook.”
Expectations of higher official interest rates in the market compared to those elsewhere usually cause money market and government bond yields to rise, attracting liquidity to a country while strengthening its currency at least in the short term.
Wednesday’s data showed that British consumer price inflation fell less-than-expected in March to 10.1% from 10.4% in February, meaning Britain had the highest inflation rate in Western Europe.
“It appears that a 10% UK CPI reading was the cause. This has revived fears that interest rates will remain high for longer in the UK – and Europe,” said Fouad Razakzadeh, market analyst at City Index.
Deutsche Bank (ETR:) on Wednesday raised expectations for UK interest rates to include a 25 basis point rate hike from the Bank of England. Morgan Stanley (NYSE:) Now sign one, risk a second.
Coin bid prices at 2:42 PM (1842 GMT)
Description RIC Last US Close Pct Change YTD Pct High Bid Low Bid
previous change
a class
Dollar Index 101.9200 101.7200 +0.21% -1.517% +102.2300 +101.6500
EUR/USD 1.0958 USD 1.0974 -0.15% + 2.26% + 1.0984 USD + 1.0918 USD
USD/JPY 134.7050 134.1000 +0.44% +2.73% +135.1300 +133.9600
EUR/JPY 147.61 147.17 +0.30% +5.21% +147.8600 +147.0500
USD/CHF 0.8974 0.8962 +0.16% -2.93% +0.9002 +0.8959
GBP/USD 1.2440 USD 1.2425 + 0.14% + 2.88% + 1.2474 USD + 1.2393 USD
USD/CAD 1.3456 1.3388 +0.51% -0.69% +1.3458 +1.3386
AUD/USD 0.6716 USD 0.6729 -0.17% -1.46% + 0.6741 USD + 0.6690 USD
EUR/CHF 0.9834 0.9831 +0.03% -0.62% +0.9848 +0.9826
EUR/GBP 0.8806 0.8831 -0.28% -0.43% +0.8838 +0.8792
NZD/USD 0.6204 USD 0.6206 -0.06% -2.32% + 0.6225 USD + 0.6174 USD
Dollar / Norway 10.5690 10.4730 +1.02% +7.81% +10.5840 +10.4820
Euro / Norway 11.5779 11.4795 +0.86% +10.33% +11.5960 +11.4735
Dollar / Sweden 10.3422 10.3135 +0.13% -0.63% +10.3750 +10.3008
Euro / Sweden 11.3277 11.3132 +0.13% +1.60% +11.3362 +11.3029