U.S. dollar rallies to more than 2-year hike on steep Fed rate hike outlook

(Adds bank affiliation BNP Paribas in analyst quote in 5th paragraph)

By Gertrude Chavez-Dreyfuss and Stefano Rebaudo

NEW YORK (Reuters) – The dollar surged to a more than two-year high on Friday, continuing to draw support from Federal Reserve Chair Jerome Powell’s comments on Thursday that more or less backed a half a percentage point tightening at next month’s policy meeting, including consecutive rate increases this year.

The dollar index, a gauge of the greenback’s value against six major currencies, hit 101.6, the highest since March 2020, It was last up 0.4% at 100.99. So far this year, the dollar has gained 5.7%.

Powell said a half-point interest rate increase “will be on the table” when U.S. central bank meets on May 3-4.

Fed funds futures have started to price in a third 50 basis-point hike in July, after the same increase in May and June, AND nearly 248 basis points of cumulative increases in 2022.

“Even if the Fed does back-to-back-to-back 50 basis-point hikes, that’s still at a rate that is at the bottom end or below neutral,” said Calvin Tse, head of Americas Developed Markets Strategy (FX, Rates, Equities), at BNP Paribas in New York.

“Even if the Fed is doing that, they likely don’t feel that it’s excessive tightening because even after these hikes are put in place, policy will still be loose, still accommodative,” he added.

Across the Atlantic, the euro fell 0.4% to $1.0793, after European Central Bank officials sent mixed policy signals.

ECB President Christine Lagarde struck a dovish tone on Thursday by saying the central bank might need to cut its growth outlook a day after ECB dove Luis de Guindos joined some policymakers in calling for an early end of the bank’s asset buying scheme coupled with a rate rise in July.

Matthew Ryan, senior market analyst at Ebury said “several ECB members were open to a rate hike in July, but Lagarde’s comments continued to be non-committal.”

“Frankly, we think the ECB risks falling quite significantly behind the curve,” he added.

Investors are also waiting for Sunday’s run-off of French presidential elections between incumbent Emmanuel Macron and far-right challenger Marine Le Pen, with the latest polls showing Macron winning with 55% of the votes.

Le Pen’s win could provoke tensions with European allies and weigh on the euro, analysts said.

Sterling fell against the dollar to its lowest since November 2020 after sales data and recent Bank of England comments signalled a possible slowdown in the expected monetary policy tightening path.

The pound fell 1.4% against the dollar to $1.2844a, after hitting $1.2839, the lowest since October 2020.

The Japanese yen was flat against the dollar at 129.37 but still within striking distance of its weakest level since April 2002 at 129.43 yen per dollar hit on Wednesday.

Since the beginning of the year, the yen has lost more than 10% of its value against a resurgent dollar. A weak yen has raised the cost of import prices such as commodities, which are still priced in dollars.

Traders remained wary of intervention from Japanese monetary officials to strengthen the yen.

Japanese television broadcaster TBS reported on Friday that Japan and the United States likely discussed the idea of coordinated currency intervention to stem further yen falls during a bilateral finance leaders’ meeting.

Japanese Finance Minister Shunichi Suzuki described recent yen falls as “sharp” and said he agreed with U.S. Treasury Secretary Janet Yellen to communicate closely on currency moves.

The Chinese offshore yuan fell 0.9% to a fresh 12-month low of 6.548 yuan per dollar in London trade and looked set for its worst week in more than 2-1/2 years. Market participants wondered if this week’s fall was a policy response to counter the economic slowdown.

(The story refiles to add bank affiliation BNP Paribas in analyst quote in 5th paragraph.)

(Reporting by Gertrude Chavez-Dreyfuss in New York and Stefano Rebaudo; Editing by Tomasz Janowski)