The dollar surged to a 10-day high on Thursday, February 22, after minutes from the U.S. Federal Reserve’s January meeting showed policymakers confident in rising inflation and the need for interest rates to keep increasing.
The dollar index, which measures the greenback against a basket of six major currencies, climbed to as high as 90.235, the strongest since Feb. 13.
What was widely interpreted as a slightly more upbeat tone in the minutes of the Jan 30-31 meeting, released on Wednesday, cemented expectations that the Fed will hike rates under its new chief Jerome Powell next month, and that rates will be hiked on at least another two occasions in 2018.
The minutes also showed voting members, as well as the wider group of policymakers, had upgraded their forecasts for the economic outlook since December.
That left the greenback up more than 2 percent from the three-year low it plumbed on Friday, and on track for its first weekly gain of 2018.
“The release of the FOMC (Federal Open Market Committee) minutes has given the dollar a small lift, with confidence expressed that activity and inflation was moving on the right path to merit further gradual rate hikes,” said ING’s head of currency strategy in London, Chris Turner.
“(But) the Fed story has not had much bearing on the dollar over recent quarters, where a recovery in investment opportunities overseas and… concerns about Washington’s dollar policy and twin deficits have driven the dollar lower,” he added. “We think there is a lot more dollar weakness to come.”
The traditional positive correlation between U.S. Treasury yields and the dollar has broken down this year, with analysts explaining the decoupling by arguing that it is worries about runaway inflation that have been driving yields higher.
But that correlation was back in place, at least temporarily, on Thursday, with 10-year Treasury yields pushing towards 2.95 percent as the dollar climbed.
Market participants probably interpreted the Fed minutes as leaving open the possibility that the central bank could raise interest rates four times this year, said Hirofumi Suzuki, an economist for Sumitomo Mitsui Banking Corporation (SMBC) in Singapore.
“A March rate hike is probably a done deal, and there seems to be an upgrade of the views on the economic outlook, so I can understand how market participants would think that there is a chance that the pace of rate hikes could increase to four times this year,” Suzuki said.
“But personally, I have doubts as to whether that’s the Fed’s true intent,” Suzuki said, adding that chairman Powell’s Feb. 28 congressional testimony on monetary policy would be a key near-term focus.
