This year, the dollar hit its highest level in early dealings in Europe on Thursday after the Federal Reserve's press conference led many to expect more monetary policy tightening than previously expected.
Fed Chair Jerome Powell dodged a question about whether the Fed would hike in successive meetings this year, leaving open the possibility of more than three hikes by the end of 2022. He also confirmed that the first hike would be in March, as widely expected.
"The committee is of a mind to raise the federal funds rate at the March meeting assuming that conditions are appropriate for doing so," Powell said, adding that "the economy no longer needs substantial levels of monetary policy support."
Short-term interest rate futures now imply a 20% risk that the first hike will be 50 basis points, rather than 25 basis points, while interest-rate sensitive U.S. two-year bond yields surged to a two-year high of 1.20%.
By 3 AM ET (0800 GMT), the dollar index, which tracks the greenback against a basket of six developed market currencies, was up 0.5% at 96.83, with its most significant gains coming against higher-yielding currencies such as the Australian and New Zealand dollar. The Canadian dollar also slipped 0.5% to C$1.2725 after the Bank of Canada kept its key rate unchanged on Wednesday but signaled that its first hike would not belong in coming.
The euro dipped below $1.12 for the first time since November but retraced some of its losses to trade at $1.1199, while the pound also fell 0.4% to $1.3413.
That's the lowest level for sterling this year, but the pound has enjoyed more support from expectations that the Bank of England will raise its key rate for the second time at its meeting next week.
Analysts at ING said they expected the dollar to remain bid going into the Fed's next meeting in March.
 Trade With A Trusted Broker |
"This is probably the key debate for FX markets over coming months - whether to seek dollar strengthening over the low-yielders or buy dollars against everything, ING's Chris Turner and Francesco Pesole wrote in a note to clients. "
While acknowledging that we are going through a rocky period for risk assets, we think it is too early to conclude that Fed is tightening or high energy prices severely choke global growth this year and would prefer the former scenario of dollar strength largely being played out against the low-yielders."
Later Thursday, the South African central bank is expected to raise its key rate by 25 basis points to 4.0%, while Chile's increased by 150 basis points to 5.5% on Wednesday.
The dollar's strength will be tested at 8:30 AM ET by the release of fourth-quarter gross domestic product data for the U.S., while weekly jobless claims have arisen in the last two weeks due to the wave of Omicron-variant Covid-19 – are due at the same time. Source
