Dollar hits two-month high on Fed rate projection

by Jonathan Adams
Dollar

The dollar index rose 0.53% at 91.892, its highest since mid April

The dollar hit a two-month high against a basket of currencies Thursday, after U.S. Fed projected a hike in interest rates and end to emergency bond-buying sooner than expected.

A majority of 11 Fed officials agreed on at least two quarter-point rate increases for 2023, adding they would keep policy supportive for now to encourage a labour market recovery.

The dollar index rose 0.53% at 91.892, its highest since mid April. The dollar surged nearly 1% on Wednesday, its largest daily percentage gain since March 2020.

Coming into the Fed meeting we felt there was a risk of a more hawkish outcome which could drive some USD strength if it came to happen, said Chuck Tomes, associate portfolio manager at Manulife Asset Management in Boston.

Because of that, we did put some protection on in case of that happening, he said.

Still, Tomes said he sees the dollar rangebound to weaker over the longer term.

Goldman Sachs and Deutsche Bank abandoned calls to short the dollar after the Fed’s new projection.

We continue to forecast broad U.S. Dollar weakness, driven by the currency’s high valuation and a broadening global economic recovery, analysts at Goldman Sachs wrote in a note on Wednesday.

However, more hawkish Fed expectations and the ongoing tapering debate look likely to be a headwind to Dollar shorts over the near term, said the analysts, closing their recommendation to go long the euro against the dollar.

The Australian dollar dropped 0.72% at 0.75545, its lowest since April 1.

Australia also had upbeat data, with job creation beating expectations in May and unemployment diving to pre-pandemic lows.

The dollar was 0.77% higher against the Norwegian crown after Norway’s central bank kept its key interest rate unchanged, but said an increase was likely in September and steepened its trajectory of subsequent rate rises as the economy recovers from the effects of COVID-19.

The stronger dollar sent sterling below $1.40 to a new 5-week low.



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