Dollar Stands Tall as Fed Heads Toward Taper

The Fed is expected to announce the tapering of its $120 billion-a-month asset purchase programme in its policy statement at 1800 GMT.

But traders are focused on clues around what that means for timing of rate rises, after a month of seismic bond market moves in anticipation of hikes as soon as next year. [US/]

“The market is not easily convinced that there will be an extended lag between the completion of taper and the start of the rate hiking cycle,” said OCBC Bank rates strategist Frances Cheung.

“Fed Fund futures pricing of two rate hikes by end-2022 does not look as stretched as the pricing in markets such as SONIA futures (GBP) or bank bill futures (AUD).”

A day ago, the Reserve Bank of Australia abandoned its short-term yield target and dropped its expectation of holding rates at record lows until 2024, though the Aussie fell because the bank also pushed back on aggressive pricing for 2022 hikes.

The Aussie had dropped 1.2% against the dollar on Tuesday and sat at $0.7436 on Wednesday. The kiwi was also dragged 1% lower, but found support on Wednesday from strong labour data and hovered at $0.7120. [AUD/]

Currency markets’ next moves likely depend on traders’ perceptions of the relative pace of policy tightening and on whether markets can stick with an assumption that the Fed funds rate won’t get much higher than 1.75% through the cycle.

“Fed Policy is under challenge in ways that cannot be remembered since the early Volcker years,” said Deutsche Bank strategist Alan Ruskin.

“Inflation is taking off with an economy that has been pricing itself off zero nominal rates and dramatic negative real rates for the last 18 months,” he said.

So far, Ruskin added, the dollar had been held back by rising expectations of even faster hiking elsewhere in the world, but risks lie ahead if traders start to think that more than a few rate rises will be needed to tame fast-rising prices.

“If the expected resilience of the real economy to rate hikes is correct, and inflation is similarly stubborn, the market expectations on the terminal funds rate at near 1.75% by the end of 2026 looks way too low,” he said.

Also ahead this week is a Bank of England meeting where swaps pricing points to a modest rate hike, but a falling currency suggests a risk of disappointment or at least of a fairly stern push back against market inflation expectations.

“I lean towards a 15bps hike at this meeting with a 5-4 vote in favour,” said Luke Suddards, strategist at broker Pepperstone.

“However, because this is basically baked into the price, I would say the risk is for sterling to weaken if they decided rather to hold and we see some dovish repricing in money markets.”

Sterling sat just above a two-week low at $1.3628 in Asia, roughly in the bottom half of range it has traded since July.

Besides the Fed meeting, eurozone unemployment data is due later on Wednesday and several European Central Bank officials make public appearances, with French central bank head Francois Villeroy de Galhau the most notable at 1300 GMT.

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Currency bid prices at 0512 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar

$1.1582 $1.1580 0.03% -5.20% 1.1588 1.1575

Dollar/Yen

113.8250 113.9600 -0.04% 10.28% 114.0050 113.9100

Euro/Yen

131.84 131.95 -0.08% 3.88% 132.0000 131.7600

Dollar/Swiss

0.9138 0.9146 -0.07% 3.31% 0.9151 0.9137

Sterling/Dollar

1.3629 1.3615 0.11% -0.23% 1.3633 1.3606

Dollar/Canadian

1.2419 1.2410 0.06% -2.48% 1.2422 1.2407

Aussie/Dollar

0.7436 0.7429 0.08% -3.35% 0.7440 0.7425

NZ

Dollar/Dollar 0.7120 0.7110 0.15% -0.84% 0.7130 0.7107

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ