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Expectations for a 75 basis-point increase at the conclusion of
a two-day meeting on Wednesday are nearly baked into prices,
according to CME's Fedwatch Tool with investment banks like
Goldman Sachs expecting a 75 basis-point rate hike in June and
July, and a 50 basis-point rise in September.
A 75 basis-point increase would be the biggest since 1994 and
with world stock markets nursing deep losses, the dollar's
appeal as a safe-haven asset is also boosting its allure.
"There is no compelling signs of bargain hunting in riskier
currencies or profit taking on long dollar positions after
yesterday's fireworks... You don't want to be short the dollar
in that scenario," said Kenneth Broux, a strategist at Societe
Generale in London.
Friday's red-hot inflation reading fuelled the worst day on
two-year U.S. Treasury bonds since 2009; taken together with
Friday's post-CPI jump, yields rose around 54 bps, the biggest
two-day move since just after the 2008 Lehman collapse, Deutsche
Bank said.
Widening rate differentials in favour of the United States have
boosted the greenback's appeal while reduced long positions have
also helped traders to pile on the long dollar trade.
Traders own just 12 billion dollars, which is roughly one
quarter of the record long established at the start of the last
U.S. tightening cycle in 2015.
It has hit one-month highs on the euro, Australian dollar, New
Zealand dollar, Swiss franc and Canadian dollar and it made a
new one-month top of $1.0397 per euro on Tuesday, before
retreating slightly to $1.0475.
Nerves about official intervention also gave brief respite to
the yen, but it was soon on the back foot after the Bank of
Japan expanded a round of bond purchases, knocking the 10-year
government bond yield back to its 0.25% cap.
It last traded at 134.18 per dollar after hitting a 24-year low
of 135.22 on Monday.
(Reporting by Saikat Chatterjee; editing by Ed Osmond)
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