Fed rate hike bets underpin dollar after Powell testimony; yen rises

SINGAPORE - 28 February 2018: The dollar stood near a three-week high against a basket of currencies on Wednesday, after upbeat views from Federal Reserve Chairman Jerome Powell on the economy encouraged bets on further Fed interest rate hikes this year.

Testifying before the U.S. House of Representatives’ Financial Services Committee, Powell acknowledged the economy had strengthened recently, a remark that prompted investors to increase bets on four Fed rate increases in 2018.

The Fed’s last round of economic projections in December pointed to three rate increases this year.

The dollar index, which measures the greenback against a basket of six major currencies, last traded at 90.395, after hitting a high of 90.498 on Tuesday, its strongest level in almost three weeks.

“Personally, I wonder whether his (Powell‘s) comments were all that bullish on the economy, but that seems to be the market’s interpretation,” said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

The Fed is expected to approve its first rate increase of 2018 at its next policy meeting in March, when it will also provide updated economic projections and Powell will hold his first news conference as chair.

The dollar fell 0.2 percent to 107.10 yen.

The yen edged higher after the Bank of Japan on Wednesday trimmed the amount of super-long Japanese government bonds (JGBs) it offered to buy at its regular debt buying operation.

BOJ officials have said that any changes to bond-buying operations are fine-tuning and not meant as hints to future policy.

The currency market, however, has been sensitive to adjustments to the BOJ’s bond-buying operations, especially after a reduction in the central bank’s buying of long-dated JGBs in January sparked speculation that the BOJ was moving towards an exit from its heavy stimulus.

The yen, a safe haven currency that attracts demand in times of economic uncertainty, also held firm after weak factory data from China dented Asian equities and undermined investor risk appetite.

Analysts said the dollar could face headwinds against the yen over the next few weeks due to the potential for dollar-selling by Japanese players ahead of Japan’s financial year-end in March.

“Once we get past the middle of March and (flows from) exporters and repatriation abate, the dollar will probably gradually show firmness against the yen,” said Sumitomo Mitsui Banking Corporation’s Okagawa.

BOJ Governor Haruhiko Kuroda said in parliament on Wednesday that once the central bank starts to normalise monetary policy the process would be “very gradual” and that the BOJ would pay attention to any risks to the economy.

The euro eased 0.1 percent to $1.2224, after briefly slipping to $1.2215, its lowest since Feb. 9. Against the yen, the euro hit a five-month low of 130.82 yen and was last down 0.3 percent at 130.96 yen.

Analysts have said the euro could be subject to potential swings in price as Italians prepare to vote in a national election on Sunday, and the leading political parties in Germany decide on a coalition deal that could secure Angela Merkel a fourth term as chancellor.