U.S. Fed Hawks Put The Dollar On Track For Best Quarter Since 2022
The dollar is poised for its best quarter since late 2022 as Federal Reserve officials push back against the latest bout of rate-cut wagers.
(Bloomberg) -- The dollar is poised for its best quarter since late 2022 as Federal Reserve officials push back against the latest bout of rate-cut wagers.
Hawkish remarks from Fed Governor Christopher Waller added to speculation the US central bank is in no hurry to loosen policy and will lag other major rate-setters when it finally comes to pivot. That curbed market bets on the timing of rate cuts and helped drive the euro below 1.08 per dollar for the first time in a month.
There’s plenty coming in the final days of March that could extend the greenback’s 3% run against major peers in the past three months — the strongest appreciation since the third quarter of 2022. The Fed’s preferred inflation metric is due Friday, along with a speech by Jerome Powell.
“The market could react in quite an asymmetric fashion to tomorrow’s PCE release, with an above-consensus print prompting quite a sharp repricing,” Rabobank strategists including Richard McGuire wrote in a note to clients, referring to the core personal consumption expenditures price index, which strips out volatile food and energy components.
Treasuries fell ahead of the highly-anticipated release, driving the yield on two-year Treasury notes up as much as seven basis points to a near one-week high.
The prospect of later rate cuts by the Fed is burnishing the comparative appeal of the US currency. Last week, the Swiss National Bank became the first developed-market central bank to reduce rates, while policy hawks at the Bank of England softened their stance.
Europe’s “significantly weaker cyclicals” mean the European Central Bank will need to “dramatically outpace the Fed in terms of easing this year,” Simon Harvey, head of FX analysis at Monex Europe wrote in a note.
In Japan, meanwhile, the central bank’s first rate hike since 2007 has failed to change the yen’s weakening trajectory against the dollar.
The prospect for a stronger dollar could push the euro toward 1.07 in the coming days, according to Harvey.
Traders are now betting on a 60% possibility that the Fed will start cutting rates in June, down from nearly 80% a week ago. According to the Rabobank strategists, traders could give up on a June hike altogether.
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