©Reuters. This illustration taken on July 17, 2022 shows a US dollar bill. REUTERS/Dado Ruvic/Illustration/File Photo
Written by Uncle Banerjee
SINGAPORE (Reuters) – The dollar rose on Tuesday as investors refrained from betting on short-term interest rate cuts by the U.S. Federal Reserve following hawkish comments from European Central Bank officials, but the Fears of further attacks on ships weighed on risk sentiment.
The dollar rose 0.253% to 102.90 against a basket of currencies, after rising 0.2% overnight in weak trading on Monday's US holiday.
The euro fell 0.3% to $1.09185, its biggest single-day decline in two weeks. The pound fell 0.36% on the day to $1.2681, just shy of the five-month high of $1.2825 reached in late December.
Comments from European Central Bank officials against early interest rate cuts have cast a shadow over the outlook for global interest rates. “It's too early to talk about rate cuts. Inflation is too high,” ECB chief Joachim Nagel said on Monday, adding that the mistake of cutting rates too soon should be avoided.
Money markets are pricing in the ECB's 145 basis points cut in deposit rates this year, which is likely to start in April.
Charu Chanana, head of currency strategy at Saxo in Singapore, said: “The ECB's hawkish commentary last night has heightened concerns that the market will also become bullish in pricing the Fed's rate path.'' ” he said.
“Demand for some safe havens is also likely to be playing a role as disruptions in the Red Sea intensify.”
Yemen's Houthi movement officials said Monday that the group plans to expand its targeting of U.S. warships in the Red Sea region, vowing to continue its attacks following the U.S. and British attacks on its bases in Yemen.
Investors are now bracing for comments from the US Federal Reserve's Christopher Waller. Waller turned dovish in late November, sending the market soaring in a wild year-end rally. Waller is scheduled to speak later Tuesday.
According to the CME FedWatch tool, the market is pricing in a 70% chance that the Fed will cut interest rates by 25 basis points (bps) in March, compared to 77% a day earlier and 63% a week ago. It highlights the changes. .
However, traders are expecting more than 160 basis points of interest rate cuts this year, higher than the 140 basis points of easing expected last week.
“We think the market is pricing in and ahead of the Fed's nearly seven 25 basis point rate cuts this year,” said Hamish Pepper, fixed income and currency strategist at Harbor Asset Management. He added that a reassessment of the dollar is likely to support the dollar. Expectations rise and short-term interest rates rise.
“While it is true that inflation, including through core policies, is falling faster than expected, the labor market remains overheated and it may be difficult for inflation to fully return to 2%.” Stated.
Yields rose 5.3 basis points to 4.003%, while the two-year Treasury yield, which typically moves with interest rate expectations, rose 7.3 basis points to 4.211%.
A data-rich week awaits, with reports on China's fourth-quarter growth and U.S. retail sales all due on Wednesday. Sterling traders will be keeping an eye on this week's employment and inflation data as they fine-tune their interest rate models.
Markets are pricing in a 2024 rate cut by the Bank of England of around 120 basis points, with the first rate cut most likely in May.
Meanwhile, the yen fell 0.20% to 146.07 yen to the dollar, after data showed Japan's wholesale inflation rate was flat year-on-year in December, slowing for the 12th consecutive month.
The data suggests that the rise in consumer inflation will moderate in the coming months, reducing pressure on the Bank of Japan (BOJ) to phase out its massive economic stimulus package sooner. There is.
Expectations for a change in the Bank of Japan's policy led to the yen's appreciation toward the end of 2023, rising 5% against the dollar in December. Since then, it has fallen sharply, falling 3% as of January.
Elsewhere, the Australian dollar fell 0.53% to $0.6625, and the New Zealand dollar fell 0.46% to $0.61715.
