Dollar rally loses steam as traders wait on Fed, data

SINGAPORE  – The dollar was parked below recent peaks on Tuesday, as a three-week rally faded and traders waited on economic data to figure on whether it’s warranted to push the dollar up any further.

Strong U.S. labor data and sticky inflation have raised U.S. rate expectations and supported the dollar’s rally so far this month – Tuesday’s European and U.S. manufacturing data and Friday’s core PCE price index will guide the next steps.

After a quiet Monday thanks to the President’s Day holiday in the United States, the dollar stood steady at 132.24 yen and $1.0687 per euro, with the common currency finding strong support above $1.06.

The U.S. dollar index has climbed three weeks in a row for a gain of about 1.7 percent through February so far, but has steadied at 103.86, down from a six-week high of 104.67 hit on Friday.

“Friday’s inability of euro/dollar to push lower after breaking below $1.0650 rather sums up the FX market for me,” said Societe Generale strategist Kit Juckes.

“There are two reasons why the dollar’s bounce is getting stuck,” he added, noting that European and U.S. growth forecasts are converging and the difference in relative rate expectations is narrowing.

“I suspect that further significant dollar strength will require the Fed Funds futures market to start pricing in a 50 basis point rate hike in March,” he said.

Fed funds futures currently imply about a 16% chance of that, while in Europe a 50 bp hike in March is all but priced in. Elsewhere currency markets were broadly steady.

Gains in oil prices and a steady Chinese yuan gave support to the Australian dollar which sat at $0.6920 as traders awaited the release of minutes from the Reserve Bank of Australia’s February meeting.

The New Zealand dollar held at $0.6259 ahead of a central bank meeting on Wednesday. Markets are pricing a 50 bp hike to bring New Zealand’s benchmark interest rate to 4.75 percent and are also weighing the economic impact of Cyclone Gabrielle.

“As markets contemplate the cost of rebuilding and the impact that’s likely to have on inflation, insurance flows and infrastructure spending, it’s quickly becoming a potential driver of sustained New Zealand dollar strength,” ANZ analysts said.

Sterling was steady at $1.2042. Overnight the Swedish crown jumped as inflation turned sticky and central bank minutes showed policymakers prepared to keep hiking.

Bitcoin found support after Hong Kong’s markets regulator published proposed rules to licence crypto exchanges, seen as a step in the direction of encouraging the city’s development as a crypto hub.