The greenback climbed while US Treasuries slipped after Federal Reserve Chair Jerome Powell said policymakers are prepared to raise interest rates further if needed in the fight to reign in inflation.
(Bloomberg) — The greenback climbed while US Treasuries slipped after Federal Reserve Chair Jerome Powell said policymakers are prepared to raise interest rates further if needed in the fight to reign in inflation.
The Bloomberg Dollar Spot Index strengthened on Friday, bringing its weekly advance to 0.2%. The US currency is poised to cap off a six-week streak of gains, the longest since May 2022. All Group of 10 currencies minus the Australian dollar weakened against the greenback this week as investors contemplate the Fed’s path.
“Powell is even slightly more hawkish than expected,” said Valentin Marinov, head of G-10 FX strategy at Credit Agricole. “The persistent tightening of financial conditions could erode risk sentiment in another boost to the dollar.”
The dollar has been rebounding as hope builds that the US may be able to skirt a recession while the Fed may have to persist in its rate hiking regime for a little bit longer to bring down inflation to the central bank’s 2% target.
Expectations for additional rate increases crept higher during and then after Powell’s speech. Overnight index swaps are pricing in around 17 basis points of additional rate hike premium for the November policy meeting, up from 15 basis points at Thursday’s close. That suggests a 68% chance of a 25 basis point hike at the meeting.
Investors will now look to next week’s labor data for more clarity on the Fed’s rate path.
“Powell’s ability to stay firm on inflation is helped by upward revisions to growth expectations,” Societe Generale strategist Kit Juckes said. “He spent much more time making sure we understand they will keep policy tight until they win the inflation fight than talking about growth.”
The euro nearly erased its loss on the day after European Central Bank President Christine Lagarde said the ECB will set interest rates as high as needed to tame inflation. The currency earlier fell to a session low of 1.0766 per dollar, the weakest level since mid-June.
For UBS Global Wealth Management’s Solita Marcelli, the euro offers more upside than the dollar, and she expects the Fed to end its tightening cycle ahead of the ECB.
“Our base case is that the Fed has already reached the end of its tightening cycle,” wrote Marcelli wrote in a report, adding that “views on the Fed could continue to shift in response to data over coming weeks.”
–With assistance from George Lei and Edward Bolingbroke.
(Updates markets throughout, adds comments from ECB’s Lagarde in eighth paragraph)
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