Dollar hits one-week high as investors eye Fed rate hikes

[March 23, 2016]  By Jemima Kelly

LONDON (Reuters) - The dollar rose to a one-week high against a basket of major currencies on Wednesday, boosted by hawkish comments by U.S. Federal Reserve officials and safe-haven demand following Tuesday's attacks in Brussels.

Three-month sterling implied volatility soared as investors prepared for turbulence exactly three months before a referendum on Britain's EU membership. The currency had been the biggest loser among major currencies on Tuesday, with the events in Brussels seen boosting the "Brexit" campaign.

The euro also fell after the attacks and the currency was again weaker on Wednesday, hitting a one-week low of $1.1180.

That was partly due to broad strength in the dollar, which gained after comments supporting more U.S. interest rate hikes from the heads of the Philadelphia and Chicago Federal Reserves.

But BNY Mellon currency strategist Neil Mellor in London said that though the comments had given a short-term boost to the dollar, they had not changed the fundamental U.S. monetary policy picture.

"The fact is that the Fed is only going to be tightening twice this year and the risks are still skewed to the downside for the dollar," he said. "The outflows are quite considerable and those have been pretty good at tracking the dollar index over time."

The dollar index, which tracks the U.S. currency against six major rivals, rose about 0.3 percent to 95.980, its highest since March 16.

Against the yen, the greenback was 0.2 percent up at 112.60.

Philadelphia Fed President Patrick Harker said the central bank should consider another hike as early as next month if the U.S. economy continues to improve, and that he would prefer at least three hikes before year-end.

Chicago Fed President Charles Evans also said he expects two more rate increases this year, unless economic data comes in a lot stronger than expected or inflation picks up faster than anticipated.

Data last week showed underlying U.S. inflation increased more than expected in February as rents and medical costs maintained their upward trend.

"You've had U.S. inflation data tick up a bit, some hawkish comments, and then you've had that big paring back in dollar longs over the past year," said Rabobank currency strategist Jane Foley, in London.

"That suggests to me it might be difficult for the dollar to carry on going down... The Fed is still the only central bank in rate hike mode in the G10."

(Additional reporting by Lisa Twaronite in Tokyo; Editing by Louise Ireland and Angus MacSwan)

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