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Dollar jumps as Powell flags higher terminal rate
Global Banking & Finance Review®
Company
By Karen Brettell
NEW YORK (Reuters) – The dollar extended gains against a basket of currencies on Tuesday after Federal Reserve Chair Jerome Powell said that the U.S. central bank will stay the course until the job is done, adding that the ultimate level of interest rates is likely to be higher than previously anticipated.
Powell also said that the Fed is prepared to increase the pace of rate hikes if data indicates it is warranted. That comes after the bank slowed the pace of its tightening to 25 basis points at its last two meetings, following larger hikes last year.
“Powell is explicitly talking about a higher target for interest rates. This is something that the market has been talking about but obviously hasn’t been fully priced in,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.
Fed funds futures traders raised bets that the Fed will hike rates by 50 basis points at its March 21-22 meeting to 56% after Powell’s comments. A 25 basis points increase is now seen as a 44% probability.
Investors will be closely watching the Fed’s updated “dot plot” of rate expectations at March’s meeting for further indications of how high Fed officials expect to raise rates.
“The market is zeroed in on the March 22 ‘dot plot’ for a clear signal” of what the terminal rate is likely to be, said Adam Button, chief currency analyst at ForexLive in Toronto.
Traders are now pricing for the rate to peak at 5.57% in September.
The dollar index was last up 0.70% on the day at 104.97. The euro dropped 0.64% to $1.0615.
The greenback gained 0.45% to 136.50 Japanese yen.
Sterling slipped 0.95% to $1.1913, after getting as low as $1.1880, the lowest since Jan. 6.
The Aussie dollar also continued to underperform, dropping to $0.6605, the lowest since Nov. 22.
It had slid earlier after the Reserve Bank of Australia (RBA) raised its cash rate by 25 basis points to the highest in more than a decade, as was expected, but suggested it might be nearly done tightening.
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Currency bid prices at 10:37AM (1537 GMT)
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
Previous Change
Session
Dollar index 104.9700 104.2600 +0.70% 1.430% +105.2600 +104.1100
Euro/Dollar $1.0615 $1.0684 -0.64% -0.93% +$1.0695 +$1.0587
Dollar/Yen 136.4950 135.9250 +0.45% +4.13% +136.9000 +135.5600
Euro/Yen 144.89 145.17 -0.19% +3.27% +145.4400 +144.6100
Dollar/Swiss 0.9382 0.9308 +0.80% +1.47% +0.9398 +0.9288
Sterling/Dollar $1.1913 $1.2027 -0.95% -1.50% +$1.2065 +$1.1880
Dollar/Canadian 1.3698 1.3612 +0.65% +1.11% +1.3726 +1.3600
Aussie/Dollar $0.6629 $0.6732 -1.55% -2.77% +$0.6748 +$0.6605
Euro/Swiss 0.9959 0.9942 +0.17% +0.65% +0.9965 +0.9926
Euro/Sterling 0.8907 0.8880 +0.30% +0.71% +0.8915 +0.8858
NZ $0.6158 $0.6197 -0.66% -3.05% +$0.6221 +$0.6140
Dollar/Dollar
Dollar/Norway 10.5890 10.4290 +1.80% +8.18% +10.6160 +10.4060
Euro/Norway 11.2452 11.1294 +1.04% +7.16% +11.2572 +11.1067
Dollar/Sweden 10.6296 10.4478 +1.09% +2.13% +10.6731 +10.4202
Euro/Sweden 11.2849 11.1629 +1.09% +1.21% +11.3110 +11.1400
(Reporting by Karen Brettell; additional reporting by Sinead Carew in New York; Editing by Jason Neely and Andrea Ricci)
The dollar index measures the value of the U.S. dollar against a basket of foreign currencies. It reflects the strength of the dollar and is used by traders and investors to gauge currency trends.
The terminal rate is the final interest rate level that a central bank aims to achieve in its monetary policy. It indicates the peak rate before the bank may pause or reverse its rate hikes.
Basis points are a unit of measurement used in finance to describe the percentage change in interest rates or other financial percentages. One basis point equals 0.01%.
The Federal Reserve, often referred to as the Fed, is the central bank of the United States. It regulates the U.S. monetary and financial system, including setting interest rates.
Fed funds futures are financial contracts that represent the market's expectations of future interest rates set by the Federal Reserve. They are used to hedge against interest rate risk.
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