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With the Fed clearly signalling its intent to raise interest
rates as early as March after its meeting last week, money
markets and major Wall Street banks are now expecting as many as
five rate hikes this year.
But some investors expect policymakers are preparing the markets
for a faster pace of rate increases this year to check
inflationary pressures especially after last week's strong data.
The Fed could supersize an interest rate increase to half a
percentage point if inflation remains stubbornly high, Atlanta
Fed President Raphael Bostic told the Financial Times in an
interview.
"Bostic is a non-FOMC voter so I would not get too carried away
by his comments but you could say he is testing the market
waters," said Kenneth Broux, a strategist at Societe Generale.
"The debate of 25 bps (basis points) or 50 bps in March explains
why the dollar should keep doing well and stocks could remain
shaky in the short-term."
Versus a basket of its rivals, the greenback rebounded off early
lows to steady at 97.13 after rising to a mid-2020 high at 97.44
on Friday. The dollar's 1.6% jump last week was the biggest
weekly rise since mid 2021. Long dollar positions remained near
their highest levels this year.
A quicker pace of rate hikes is also seen as dampening future
growth expectations, a scenario that is playing out in the bond
markets where spreads between two and ten-year U.S. Treasury
yields fell below 59 bps for the first time since early November
in a phenomenon known as "bear-flattening." [US/]
Market expectations of as many as five rate hikes this year
"reflects the growing belief that the Fed is behind the curve in
fighting upside inflation risks and will need to deliver more
front-loaded tightening," Mizuho strategists said in a note.
U.S. data on Friday showed the core personal consumption
expenditures (PCE) price index, the Fed's preferred inflation
gauge, rose 4.9% year-on-year, the biggest increase in 39 years.
Hedge fund positioning in currency markets also reflected a
broadly consolidative trend with net dollar long positions
edging higher but holding below recent highs.
The Australian dollar was among the early gainers versus the
greenback with the Aussie up more than 0.7% at $0.7048 before a
central bank policy meeting on Tuesday.
The Bank of England also holds its meeting on Thursday, with a
Reuters poll of economists predicting a second rate hike in less
than two months after UK inflation jumped to its highest in
nearly 30 years.
The European Central Bank also has a policy meeting on Thursday.
While no policy change is expected, analysts are starting to
warn that approaching rate hikes from the Fed will shrink the
ECB's window for action.
In cryptocurrencies, bitcoin was holding above $37,000 after a
quiet weekend for the digital asset.
(Reporting by Saikat Chatterjee; Editing by Mark Potter)
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