NEW YORK, March 8 (Reuters) - The dollar dipped modestly from three-month highs reached earlier on Wednesday as investors adjusted for the prospect of higher rates for longer after Federal Reserve Chairman Jerome Powell on Tuesday surprised markets with a more hawkish rate outlook.
Powell said that the Fed will likely need to raise interest rates more than expected in response to recent strong data and is prepared to move in larger steps if the "totality" of incoming information suggests tougher measures are needed to control inflation.
That prompted traders to reprice their rate expectations. Fed funds futures traders now see a 66% probability of a 50 basis-point hike at the Fed’s March 21-22 meeting, up from around 22% before Powell spoke on Tuesday. The rate is now expected to peak at 5.62% in September.
“I don’t think Powell told us anything we didn’t already know. I think it just shows the market sensitivity and uncertainty about where the peak Fed funds rate’s going to be,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
Powell is expected to repeat his comments in testimony before Congress on Wednesday.
Investors are now focused on February jobs data due on Friday for confirmation that continued strong jobs growth supports more rate increases. The dollar has jumped since data on Feb. 3 showed that employers added 517,000 jobs in January.
However, that “seems to be a fluke - warm weather, benchmark revisions, these kinds of things,” said Chandler. “The dollar had a big four-month selloff and I think that so far it still looks corrective in nature, that is I don’t think that we’re going to go back and retest the September and October dollar highs.”
Economists are projecting job gains of 203,000, while wages are expected to rise 0.3% for the month and 4.8% on an annual basis.
The dollar index was last down 0.09% on the day against a basket of currencies at 105.54, after earlier reaching 105.88, the highest since Dec. 1. It is up from a nine-month low of 100.80 on Feb. 1 but remains well below a 20-year high of 114.78 reached on Sept. 28.
The ADP National Employment report on Wednesday showed that private employment increased by 242,000 jobs last month.
The euro gained 0.03% to $1.0551. It fell to $1.0524 earlier and is trading just above this year's low of $1.04820 reached on Jan. 6.
“Friday’s U.S. employment data now take on particular significance” after Powell’s comments, Credit Suisse analysts including Shahab Jalinoos said in a report on Wednesday. “Data strong enough to show the rates market is not being hysterical in pricing higher Fed rates for longer would risk a test of 2023 EURUSD lows.”
The dollar fell 0.26% to 136.80 yen , after earlier reaching 137.90, the highest since Dec. 15. Sterling gained 0.06% to $1.1834, after earlier falling to $1.18105, the lowest since Nov. 21. The Aussie was up 0.23% at $0.6600, after reaching $0.6568 earlier, the lowest since Nov. 10.
Reporting by Karen Brettell; Editing by Nick Macfie