Dollar rallies to one-month high as Fed cut outlook dims

U.S. Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File photo

NEW YORK  – The dollar jumped in a volatile session on Tuesday as investors dialed back expectations for a March rate cut from the U.S. Federal Reserve, fueled in part by comments by Board Governor Christopher Waller.

Markets are pricing in a 66.9 percent chance of a rate cut of at least 25 basis points (bps) in March from the Fed, compared with an 81 percent view in the prior session according to CME’s FedWatch Tool.

The dollar index, which tracks the greenback against a basket of currencies of other major trading partners, was up 0.73 percent at 103.38, after climbing as high as 103.42, its highest level since Dec. 13. The index was on track for its biggest one-day percentage gain since Jan. 2.

The dollar added to gains on the session after Waller said the U.S. is “within striking distance” of the Federal Reserve’s 2 percent inflation goal, but that the central bank should not rush toward cuts in its benchmark interest rate until it is clear that lower inflation will be sustained.

READ: Fed’s Waller says US ‘within striking distance’ of inflation goal

“(Waller) said there’s no reason to move as quickly as they have in the past, cuts should be methodical and careful,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

“Waller is important because he is a hawk, he is obviously confirming what we already know and everybody at the Fed recognizes – that we have reached a peak.”

Chandler also noted the dollar had essentially traded sideways for the last two weeks, with oversold and technical conditions at the end of last year now being alleviated.

Goldman Sachs said in a note that while they have not changed their view the Fed will deliver a series of three consecutive cuts beginning in March, Waller’s comments increased the risk the central bank could cut somewhat later or might prefer to cut once per quarter from the outset.

While the dollar was stronger throughout the session, the greenback briefly cut gains after a weak report on the manufacturing sector in the New York region.

The euro was down 0.72 percent at $1.0869 and poised for its steepest one-day percentage drop in two weeks as comments from European Central Bank policymaker Joachim Nagel on Monday attempted to curb expectations of early rate cuts.

READ: ECB must be prepared to discuss rate cuts – Centeno

Several policymakers from the ECB on Tuesday maintained a cloud of uncertainty over the timing of the moves, although interest rates are still likely to come down this year.

Also supporting the dollar was a climb in U.S. bond yields on Tuesday after Monday’s holiday, with the 10-year up 11.9 basis points at 4.0695 percent,

An ECB survey on Tuesday showed consumer expectations of euro zone inflation three years ahead fell in a November poll to 2.2 percent from 2.5 percent.

Sterling was last down 0.79 percent at $1.262 after data showed British wage growth slowed sharply in the three months through November, supporting the idea that the Bank of England will cut rates heavily this year.

READ: US bitcoin ETFs see $4.6B in volume in first day of trading

The dollar was 1.04 percent higher against the Japanese yen, at 147.26, after hitting 147.31, matching its highest level since Dec. 7. Data showed Japan’s wholesale price index stayed flat in December from a year ago, with the rate of change slowing for the 12th straight month, taking pressure off the Bank of Japan to back away from its monetary stimulus measures soon.

In cryptocurrencies, bitcoin rose 1.39 percent to $43,272. It has fallen about 6 percent since the Securities and Exchange Commission said it approved 11 applications for the first U.S.-listed exchange traded funds (ETFs) to track bitcoin.