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The U.S. dollar surged on Wednesday, hitting a three-month peak as Jerome Powell surprised investors by warning that interest rates may have to rise faster and higher than expected to control inflation.
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The greenback rose above its 200-day moving average against the yen for the first time this year in Asian trading, hitting its highest level since mid-December at around 137.49 yen. The greenback overnight surged more than 1.2% higher against the euro, its biggest one-day move in five months. It last traded at $1.0550 per euro. The Australian dollar (AUD/USD) reportedly plunged as Powell’s hawkish stance matched the dovishness of the Australian central bank, sending the Aussie down 2% to a four-month low of $0.6580. The US dollar index (DXY) which measures the greenback against a basket of six major currencies jumped 1.3% overnight to a three-month peak around 105.65.
Powell told lawmakers on Capitol Hill that with recent economic data coming in strong and in line with expectations, the final interest rate level is likely to rise higher than previously expected. If the overall data suggests faster tightening is needed, they will be prepared to increase the pace of rate hikes. Traders now price in a nearly 70% chance of a 50-bps rate hike in March, according to the FedWatch tool, up from about a 30% chance a day ago. Futures are implying U.S. rates will rise above 5.6% and stay higher than 5.5% through 2023. Traders have a laser focus on U.S. payrolls data on Friday and inflation figures for next week.
IG Markets analyst Tony Sycamore said that if the above-mentioned data beats expectations based on what Powell said, then it would be enough to warrant a 50bps hike in March. If the hot data continues from February to March, then the dollar will have strong appeal. The pound sterling (GBP/USD) fell 1.7% overnight to its lowest level since late November and was last reported steady around $1.1832. Meanwhile, the New Zealand dollar (NZD/USD) also fell 1.5% on Tuesday, dropping slightly further in trading since Wednesday morning to a four-month low of $0.6104.
Central bank meetings and speakers are later in the day with the BoC setting policy and European Central Bank President Christine Lagarde to speak. The BoC is seen holding rates steady as it grapples with the damage the surge has done to an economy that has USD/CAD at a 4-month trough of $1.3262. Deutsche Bank strategist Alan Ruskin said that if the BoC raises rates, it will likely add to concerns about the housing bust. If they don’t, the CAD will likely fall into a basket of currencies where central banks are unwilling to follow the Fed.
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