U.S. dollar gains as strong data signal higher rates

By Laura Matthews and Harry Robertson

NEW YORK/LONDON (Reuters) – The dollar gained modestly on Wednesday against its peers as recent strong economic data eased recession fears but reinforced concerns that the Federal Reserve’s inflation-fighting interest rate hikes may stick around for longer.

Survey data released on Tuesday showed U.S. business activity unexpectedly rebounded in February to reach its highest in eight months.

St. Louis Fed President James Bullard said on Wednesday that the U.S. central bank needs to get inflation on to a sustainable path down toward its 2% goal this year or risk a repeat of the 1970s, when interest rates had to be repeatedly ratcheted up. He is the latest Fed official to signal that higher interest rates is likely needed to bring inflation back to desired levels.

“The USD along with assets market is reacting to the realization of investors that it may have been hasty to overlook the Fed’s hawkish guidance at the start of this year,” said Jane Foley, head of FX strategy at Rabobank in London. “Stronger-than-expected U.S. data releases since the start of this month have reinforced the Fed’s messages about stronger for longer interest rates.”

Fed funds futures traders are now pricing the fed funds rate to reach 5.35% in July, and remain above 5% all year. The Fed’s target range stands at 4.5% to 4.75%, having risen rapidly from 0% to 0.25% in March 2022.

The dollar index up 0.1% at 104.19, but off the high of 104.34 reached earlier in the day.

Sterling was down 0.2% at $1.2082, giving up much of yesterday’s gains, while the euro fell 0.03% to 1.0644.

(Graphic: Euro, https://fingfx.thomsonreuters.com/gfx/mkt/myvmokllrvr/Screenshot%202023-02-15%20084338.png)

Investors’ focus now turns to the release of the minutes from the Fed’s latest meeting later on Wednesday, which could offer more insight into policymakers’ plans.

“We have maintained a hawkish outlook for the Fed and therefore had been expecting the USD to garner support into the middle of the year, though the move came a little sooner than we have been expecting. For a while our 3 month EUR/USD forecast has been 1.06,” Foley said.

(Graphic: US non-farm payrolls, https://fingfx.thomsonreuters.com/gfx/mkt/zgvobnmazpd/Screenshot%202023-02-22%20082146.png)

A blockbuster U.S. employment report in early February sparked the rebound in the dollar, which has been helped along by a series of strong data releases.

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Currency bid prices at 10:39AM (1539 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 104.2300 104.1600 +0.09% 0.715% +104.3400 +104.0000

Euro/Dollar $1.0639 $1.0647 -0.08% -0.71% +$1.0663 +$1.0625

Dollar/Yen 134.6100 135.0150 -0.29% +2.68% +135.0550 +134.3750

Euro/Yen 143.23 143.77 -0.38% +2.09% +143.8800 +143.0700

Dollar/Swiss 0.9292 0.9280 +0.12% +0.48% +0.9293 +0.9255

Sterling/Dollar $1.2079 $1.2113 -0.27% -0.11% +$1.2135 +$1.2063

Dollar/Canadian 1.3554 1.3538 +0.12% +0.04% +1.3560 +1.3518

Aussie/Dollar $0.6811 $0.6856 -0.62% -0.04% +$0.6865 +$0.6811

Euro/Swiss 0.9885 0.9876 +0.09% -0.10% +0.9890 +0.9860

Euro/Sterling 0.8807 0.8786 +0.24% -0.42% +0.8822 +0.8785

NZ $0.6232 $0.6214 +0.31% -1.84% +$0.6251 +$0.6206

Dollar/Dollar

Dollar/Norway 10.3255 10.3100 -0.02% +5.03% +10.3385 +10.2845

Euro/Norway 10.9863 10.9748 +0.10% +4.71% +11.0032 +10.9587

Dollar/Sweden 10.3825 10.3819 -0.06% -0.24% +10.3893 +10.3254

Euro/Sweden 11.0469 11.0539 -0.06% -0.92% +11.0661 +11.0020

(Editing by Nick Zieminski)