Dollar slides as recent rally takes a break, may have had a short-term peak

A Korea Exchange Bank employee counts one hundred U.S. dollar banknotes during a photo opportunity at the bank’s headquarters in Seoul April 28, 2010. REUTERS/Jo Yong-Hak

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  • Dollar index on track for biggest daily decline since Jan. 12
  • The price of fed funds futures in five rate hikes in 2022
  • The Australian dollar leads the winners against the US dollar

NEW YORK, Jan 31 (Reuters) – The U.S. dollar fell on Monday, posting its biggest daily decline since last November, as investors consolidated gains after hitting a year-and-a-half high on Friday on expectations of an acceleration in the pace of rate hikes. by the Federal Reserve.

While the Fed made it clear last week that it intended to raise interest rates as early as the March 15-16 policy meeting, Wall Street banks are now expecting around five to seven rate hikes. rate this year.

On Monday evening, federal funds futures forecast just under five hikes for 2022, or about 121 basis points of tightening. They also showed a 17% chance of a 50 basis point hike in March, up from 32% on Friday.

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Atlanta Fed Chairman Raphael Bostic, a nonvoter on the Federal Open Market Committee, told the Financial Times in an interview over the weekend that the Fed could raise a rate hike to half a point. percentage if inflation remains stubbornly high. Read more

The dollar index slid 0.7% on the day, its biggest daily percentage rise in two months. For January, the greenback was up almost 1%.

“Dollar dominance has been mostly priced in as the Fed now looks set to deliver 5-7 rate hikes this year,” Edward Moya, senior market analyst at OANDA, wrote in a statement. research note.

The dollar could start to see “some underperformance relative to advanced economies that are becoming more aggressive in tightening,” he added.

Investors are also looking to Friday’s US nonfarm payrolls for an indication of how aggressive the Fed is on its tightening path. US payrolls are expected to show a gain of 153,000 jobs in January, from 199,000 in December, with the unemployment rate steady at 3.9%, according to a Reuters poll. EM

“The dollar appears to be at a high for now as Friday’s jobs report should show another lukewarm month of hiring,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

A faster pace of rate hikes is also seen as dampening future growth expectations, a scenario unfolding in bond markets where spreads between 2-year and 10-year US Treasury yields have fallen below 59. basis points for the first time since early November, a phenomenon known as “bear flattening”.

In other currencies, the Australian dollar led the gains, rising 1% to US$0.7068 ahead of a Reserve Bank of Australia policy meeting on Tuesday.

Against the yen, the dollar fell 0.2% to 115.045 yen.

The Bank of England also holds its policy meeting on Thursday, with a Reuters poll predicting a second rate hike in less than two months after UK inflation hit its highest level in nearly 30 years. Read more

The British pound was last up 0.4% at $1.354

The European Central Bank also meets on Thursday. While no policy change is expected, analysts said the Fed’s impending rate hikes would narrow the ECB’s window for action. Read more

The euro last traded down 0.8% at $1.1240, its best daily percentage gain in two months.

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Currency rates at 3:53 p.m. (8:53 p.m. GMT)

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Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Saikat Chatterjee in London; Editing by Mark Potter and Paul Simao

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