Dollar near a 2 1/2-week high as Fed decision looms

by Jonathan Adams
dollar index

The dollar index hovered near Friday’s peak of 94.302, a level not seen since Oct. 13

The dollar traded near a 2 1/2-week high to major peers on Monday as quickening inflation in the US boosted the case for earlier Federal Reserve interest rate hikes.

It approached a 1 1/2-week top to the yen after the Japanese currency weakened as a strong showing for the ruling party in weekend elections reduced political uncertainty.

The dollar index was little changed at 94.166, hovering near Friday’s peak of 94.302, a level not seen since Oct. 13.

The U.S. currency bought 114.175 yen, gaining 0.13% from the end of last week. Above 114.41 would be the strongest since Oct. 20, the day it hit a multi-year high of 114.695.

New Japanese Prime Minister Fumio Kishida’s ruling Liberal Democratic Party defied expectations and held its strong majority in Sunday’s parliamentary election, strengthening his position in a fractious party and allowing him to ramp up stimulus.

The reduction in political uncertainty is playing out with slight yen weakness this morning, said Shinichiro Kadota, senior FX strategist at Barclays in Tokyo. The bigger driver of dollar-yen direction going ahead remains the Fed.

Monetary policy in the US and elsewhere is in focus this week, with the Federal Open Market Committee (FOMC) expected to announce a tapering of stimulus on Wednesday.

A 4.4% surge in the government’s index of core personal consumption expenditures – the Fed’s preferred inflation measure – strengthened market expectations for a rates lift-off around the middle of next year.

Following the data, futures on the fed funds rate, which track short-term rate expectations, priced in a 90% chance of quarter-point tightening by June 2022, factoring in another rate increase by December.

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