The dollar rally temporarily pauses

The dollar eased on Tuesday but still hovered near a one-month peak as traders raised bets on how high the U.S. Federal Reserve would need to raise interest rates to curb inflation.

The main mover on Tuesday was the Australian dollar, which rose 1.5% to $0.6953 after the country’s central bank raised its cash rate by 25 basis points. A policy tilt than many expected.

Markets recovered from the shock of Friday’s U.S. employment report, which showed non-farm payrolls rose to 517,001 in January.

The report misled traders banking on an imminent pause in the Fed’s rate-hike cycle and sent the U.S. currency higher, though it gave back some gains in Asian trade.

The dollar index broke Monday’s one-month high and traded at 103.53, roughly unchanged.

The euro fell 0.23% to $1.0713, falling earlier in the day to its lowest level since Jan. 9.

U.S. interest rate futures show markets expect the Fed funds rate to reach more than 5.13% by June, down from expectations for a peak of 5.4% before Friday’s jobs report.

Sterling was last 0.23% higher against the dollar at $1.1993, after falling to a one-month low of $1.2004 in the previous session.

Investors are looking for further comments from central banks in what is a key takeaway from last week’s Bank of England meeting.

In Asia, the Japanese yen tried to claw back Monday’s losses, with the dollar-yen pair down 0.63% to 131.753, off Monday’s one-month low of $132.91.

Data on Tuesday showed Japan’s real wages rose in December for the first time in nine months. However, whether wage growth will continue to sustain the country’s economic recovery remains uncertain.

Sterling recovery

Sterling hit a fresh month low against the U.S. dollar as investors expect the Bank of England to end, and possibly reverse, its monetary tightening cycle soon. At the same time, the U.S. Federal Reserve might keep rates higher for longer.

High-interest rates usually support currencies.

Investors await more comments from the BoE and provisional data for English fourth-quarter gross domestic product.

While the U.K. may have just about avoided a technical recession, it is still very much in the middle of a downturn.