The dollar has rebounded from a 10-month low as investors upgraded their forecasts for US interest rates after signs of persistent inflation and better-than-expected economic activity.
The world’s main reserve currency rose to a 20-year high in September but plunged 11.2 percent in the following four months as US inflation eased from a multi-decade high, allowing the Federal Reserve to match the pace rate hikes to slow towards the end of 2022. The rise in Tamer rates and the prospect of stable or even falling rates in 2023 removed one of the currency’s key supports.
However, February has begun with a spate of economic data suggesting the world’s largest economy remains in rough shape, pushing the dollar back up 3 percent month-to-date against a basket of six other major currencies and the decline nullified in January.
The US added more than half a million jobs last month, nearly triple the consensus forecast, while inflation fell to 6.4 percent, a smaller fall than expected.
“The inflation report ruined the markets’ nice little disinflation plan,” said Florian Ielpo, multi-asset portfolio manager at Lombard Odier, and central banks are likely to keep upward pressure on rates as a result.
Jordan Rochester, a FX strategist at Nomura, said February “started with the assumption that the dollar would sell off against the euro and the yen. Since then, almost every single US data point has come in stronger than expected, and markets have slowly moved closer to what the Fed has long said that rates must continue to rise and be held for a while.”
US benchmark interest rates range from 4.5% to 4.75%. In early February, futures markets were pricing in a rate spike near 4.9 percent, with two cuts in the second half of the year pushing borrowing costs to about 4.4 percent by 2024.
A little over two weeks later, markets had shifted to forecast a high of 5.28 percent and ended the year after a single drop just over 5 percent.
Still, some investors doubt the dollar’s rally will last much longer. The port currency is likely to continue to rise this quarter but “to continue its downtrend as global growth and risk sentiment improve,” analysts at UBS said.
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