The dollar strengthened Wednesday, lifted by rising Treasury yields. However, the pound gained against the greenback after British inflation hovered above 10 per cent in March, putting further pressure on the Bank of England to raise rates.
The dollar index, which tracks the currency against a basket of its peers, rose 0.206 per cent as markets became more sceptical that the Federal Reserve would cut rates later this year.
The yield on the two-year Treasury note, sensitive to expectations for U.S. central bank monetary policy, rose seven basis points to 4.269 per cent after hitting a one-month high of 4.286 per cent.
But dollar gains were a “resistance,” said Bipan Rai, North American head of F.X. Strategies in Toronto’s CIBC Capital Markets.
“We still think the dollar will continue to come under considerable pressure in the medium to long term. And that ties into our view that the Fed will likely hike one more time, and then that’s it.”
According to CME’s FedWatch tool, futures pricing shows an 85.7 per cent chance the Fed will raise rates by 25 basis points when policymakers wrap up their two-day meeting on May 3. But the prospect of a rate cut by December has narrowed significantly this week.
Rai said that the debt ceiling pending in Congress and the migration of deposits into the U.S. banking system are still concerns, adding that the dollar has been on the defensive for some time.
Sterling was last trading at $1.244, up 0.13 per cent on the day, while the dollar rose 0.46 per cent against the rate-sensitive yen after poking briefly above $135 for the first time in a month.
The immediate outlook for the dollar is less bullish because central banks abroad are hiking more in the year’s balance than the Fed, said Joe Manimbo, senior market analyst at Converra in Washington.
“If core inflation takes longer to return to the Fed’s 2 per cent target, the Fed will have to raise rates more than once a year,” he said, adding that this could stop or slow the dollar’s slide.
“We are in a very bearish position for F.X. until we get more clarity on the policy outlook.”
Expectations of higher official rates in one market than elsewhere usually drag money markets and government bond yields higher, drawing cash into a country while appreciating its currency, at least in the short term.
Data on Wednesday showed that British consumer price inflation fell less than expected in March to 10.1 per cent from 10.4 per cent in February, meaning Britain has the highest consumer inflation rate in Western Europe.
Fawad Razzaqzada, the market analyst at CitiIndex, said, “It looks like the U.K.’s ten percent+ CPI reading was the culprit. It has revived concerns that interest rates in the U.K.—and Europe—will remain high for a long time.”
On Wednesday, Deutsche Bank revised expectations for British rates to include two more 25 basis point rate increases from the Bank of England. Morgan Stanley has now predicted a second risk.
