Dollar's rise pauses before Fed minutes; yen at 5-year lows

[January 05, 2022]  By Saikat Chatterjee

LONDON (Reuters) - The dollar held below two-week highs on Wednesday as traders awaited the release of minutes from the Federal Reserve's December meeting, with growing expectations of a rate hike as early as March keeping the yen pinned near a five-year low.

While the greenback's nearly 3% rise in the past two months on the back of rising U.S. Treasury yields fizzled this week, traders were wary of adding more bullish dollar bets before the release of the minutes.

"The Fed minutes will give some good colour on thinking as they pivoted, and there are many questions over the Fed right now which are arguably the most important such as how many hikes, how fast the tapering and balance sheet reduction," said John Marley, CEO of forexxtra, a London-based FX consultancy.

The minutes, due at 1900 GMT, could underscore U.S. policymakers' newfound sensitivity to inflation and their readiness to act. Markets have ramped up bets on a quarter percentage point rate increase by March and fully priced one in by May.

"If tapering had ended a few months ago, we think the FOMC would be raising policy rates now with the unemployment rate not far above the Fed's long-term target and core and headline inflation ...well above," Standard Chartered analysts said.

Against a basket of its rivals, the dollar index steadied at 96.269 after hitting a two-week high of 96.462 in the previous session.

The dollar gains have failed to ignite broader currency market volatility, with a market gauge holding near three-month lows.

A U.S. hundred dollar bill and Japanese 10,000 yen notes are seen in this photo illustration in Tokyo, February 28, 2013. REUTERS/Shohei Miyano

Minneapolis Federal Reserve Bank President Neel Kashkari on Tuesday said he expected the U.S. central bank to need to raise interest rates twice this year to address persistently high inflation, reversing his long-held view that rates would need to stay at zero until at least 2024.

Partial U.S. labour data on Wednesday and non-farm payrolls on Friday will also be watched for a guide to the trajectory of borrowing costs.

The Japanese yen weakened past psychological support levels versus the greenback around 115.50 on Tuesday to hit a five-year trough at 116.35. It was trading at 115.90 on Wednesday.

The risk-sensitive Australian and New Zealand dollars struggled as fears of Omicron derailing the world's economic recovery subside.

Sterling, meanwhile, has rallied about 2.7% on the dollar in a dozen trading days since Dec. 20 as traders also reckon surging Omicron cases in Britain won't deter the Bank of England from lifting rates.

(Reporting by Saikat Chatterjee; editing by John Stonestreet and Alex Richardson)

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