(Bloomberg) – The dollar rose against all major rivals on Friday, with a measure the currency erasing losses for the year as bets of more Federal Reserve rate hikes mount.
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The Bloomberg Dollar Spot Index climbed as much as 0.6% on Friday and is poised for a third weekly gain. Real money bought the dollar in size this week, mainly against the euro and yen, according to European-based traders familiar with the transactions, who asked not to be identified because they are not authorized to speak publicly .
Stronger US economic data and hawkish comments from Federal Reserve officials have prompted investors to reconsider the interest rate outlook, adding to the dollar’s appeal. Traders now expect further hikes of around 73 basis points through July from 62 late last week.
“Strong US economic and inflation data is finally giving investors the idea that the Fed is right and rates need to rise significantly,” said David Forrester, senior FX strategist at Credit Agricole CIB in Singapore.
On Thursday, two of the Fed’s most hawkish policymakers signaled they may prefer to return to larger rate hikes in the future in a bid to crush inflation. Data showed that producer prices rebounded more-than-expected in January, underscoring ongoing inflationary pressures raising expectations for Fed interest rate hikes.
“Forex momentum suggests data like this has a clear bearing on further strengthening the dollar,” wrote Derek Halpenny, head of research for global markets at MUFG in EMEA, in a note to clients.
This is a wake-up call to a widespread bearish view of the dollar, according to Viraj Patel, strategist at Vanda Research in London. Investors put too much emphasis on a dovish Fed stance and global growth outperforming the US, he said, causing the greenback to fall more than 2.5% earlier this year.
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For HSBC, the dollar’s rally won’t last long. The company’s strategists expect another “flop” towards the second quarter when the uncertainties, including about the Fed’s hiking path, subside. RBC BlueBay Asset Management, meanwhile, has preferred to take advantage of the dollar’s rebound to add long positions in the Japanese yen, which fell to its lowest since December against the greenback on Friday.
“We had a reality check that the Fed might not be much more dovish than other central banks this year,” Vanda’s Patel said. “We are reaching dollar levels that adequately reflect the macroeconomic outlook for the US.”
–With support from Marcus Wong and Vassilis Karamanis.
(Updates with context and comments throughout.)
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