The US dollar continued to climb to the range of 96.00, but a number of other currencies will also be supported by their respective higher rate hike expectations.
The US dollar index (DXY) was up and down in the New York session yesterday. However, the greenback opened higher in the Asian session this morning (11/February). The momentum has loosened going into the European session, but remains within the area to test the 96.00 level.
Yesterday's US consumer inflation data showed growth of 7.5 percent (Year-on-Year) in January 2022, much higher than consensus expectations of only 7.3 percent. The US dollar had strengthened rapidly in almost all currency pairs in response to the news, but then hit a short squeeze incident and fell instantly.
The short squeeze was only able to slam the greenback for a moment, because market participants immediately stabilized the situation. A hawkish comment from a US official helped prop the greenback back.
St. Louis Fed President James Bullard told Bloomberg he would like to see a rate hike of 100 basis points in July. This signaled his approval of the speculated "Fed rate hike" of 50 basis points in March, instead of the 25 basis points long expected by the majority of market participants.
The probability of a 50 basis point rate hike in March immediately soared in the money markets, at least up to around 50% currently. Expectations of the Fed's total interest rate hikes until the end of 2022 also increased to more than 160 basis points.
“There is clearly a sense of urgency, at least for some (Fed) members,” said Kim Mundy, a strategist at the Commonwealth Bank of Australia, “However, the Fed is not the only central bank facing this inflation dilemma (and changing policy direction to increasingly hawkish -ed)."
Mundy said the change in the attitude of the European Central Bank (ECB) last week in particular could limit the room for strengthening the dollar versus the euro. European markets look forward to more hawkish economic projections from the ECB in next month's meeting. The Bank of England (BoE) has a nearly 30% chance of raising interest rates by 50 basis points in March, as well as a nearly 100% chance of raising rates by 25 basis points.
This situation has put further pressure on currencies whose central banks have held firm to their dovish stance, including the Japanese yen. The Bank of Japan (BoJ) yesterday promised to buy an unlimited number of 10Y bonds. The decision immediately triggered USD/JPY to rise back to its highest record since January 2017.
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