The dollar scaled multi-month highs against most other major currencies on Wednesday, after Federal Reserve Chair Jerome Powell warned that U.S. interest rates might need to go up even faster and higher than expected to rein in stubborn inflation.
Higher rates benefit the dollar by improving its yield and as traders look for safety while global stock markets drop.
The dollar hit a two-month high against the euro of $1.0524 , extending Tuesday’s 1.2% jump. Sterling, the Swedish and Norwegian crowns, the Chinese yuan and the Canadian, Australian and New Zealand dollars all struck multi-month lows.
The U.S. dollar also broke above its 200-day-moving average against the yen for the first time this year, rising as far as 0.5% to a nearly three-month high of 137.9 yen .
Powell told lawmakers on Capitol Hill on Tuesday that recent U.S. economic data was stronger than expected and so the speed and size of future rate hikes may also need to increase, which sent short-term U.S. rate expectations surging.
“The dollar will have a short-term tailwind in the next few weeks due to a more hawkish Fed,” said Dane Cekov, senior macro and FX strategist at Nordea.
“We see the Fed hiking to 6% in the coming months and they might move faster now after Powell’s comments.”
Powell is back for more testimony from 1500 GMT, although prepared remarks are expected to be unchanged from those published on Tuesday.
The Canadian dollar – last at 1.3754 to its U.S. counterpart and down more than 1% since Monday – may be vulnerable to further weakness if Canada’s central bank holds rates steady later in the day, as expected.
“Rate differentials in Canada compared to the U.S. leaves the Canadian dollar under pressure, that’s something the Bank of Canada will need to follow due to imported inflation,” Nordea’s Cekov said.
The Australian dollar has weakened for a similar reason as the Reserve Bank of Australia has softened its tone. Having dropped over 2% on Tuesday, the Australian dollar recouped some losses to trade 0.2% higher at $0.66.
Powell’s remarks also sent short-term rate expectations higher, with traders now anticipating around a 65% chance of a 50 basis point U.S. rate hike in March, according to CME’s FedWatch tool, up from about a 30% chance a day earlier.
Futures imply U.S. rates peaking above 5.6% and holding above 5.5% through 2023.
Traders have a laser focus on Friday’s U.S. payrolls data and next week’s inflation numbers.
“If those data prints exceed expectations at all, based on what Powell said, that’d pretty much guarantee a 50-basis point hike in March,” said IG Markets analyst Tony Sycamore in Sydney.
The U.S. dollar index rose as much as 0.2% to a more than 3-month high of 105.88, having jumped by 1.3% on Tuesday, its biggest daily increase since Sept. 23, 2022.
Sterling rose marginally to $1.1837, after earlier hitting its lowest since late November at $1.1811.
China’s yuan finished the domestic session at 6.9706 per dollar, the weakest such close since Dec. 29, 2022.
