Rate hike bets; the dollar rising

The dollar increased after hotter-than-expected U.S. inflation.

On Thursday, data showed U.S. consumer prices rose 7.6% year-on-year in January. It was a fourth straight month above 7% and slightly higher than economists’ forecasts for a 7.2% rise.

Treasury yields leaped, and the dollar bounced to a five-week high of 116.35 yen during volatile overnight trade. The greenback fell against other currencies before turning broadly firmer in the Asia session. The euro was last down 0.5% at $1.1383, and the Australian and New Zealand dollars fell more than 0.6%.

Rates futures moved to price a better-than-expected chance of a 50 bp hike next month. More than 160 bps of tightening is priced in by the end of 2022.

Kim Mundy, Commonwealth Bank of Australia strategist in Sydney, said there is a sense of urgency, at least for some Fed members.

Overview of the dollar and other currencies

European bond markets have largely priced in a rate hike from the Bank of England. The ECB’s updated economic projections might provide a more hawkish backdrop. The central bank will keep its benchmark deposit rate unchanged at -0.5%. Most investors expect it to upgrade its GDP forecasts and move to the middle of its interest rate policy path. This shift in expectations could further boost high bond prices.

The dovish comments from the Reserve Bank of Australia (RBA) came days after the central bank sounded more hawkish. The RBA left interest rates on hold at a record low of 1.5%. It surprised markets with several comments that hinted at a future rate hike. The hawkish comments from the RBA capped off an impressive week for Australia, which saw the currency hit a five-year high and the S&P/ASX 200 hit a record high. The RBA’s comments on Friday took things even further, with Governor Philip Lowe even saying it would be possible for the RBA to hike interest rates this year.

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