Dollar pauses as Fed officials exit market to reflect on rate trajectory

TOKYO — The dollar hovered below a nearly two-decade high in Asian trading on Friday, slipping overnight after two Federal Reserve policymakers said they favored a rate hike below 100 basis points on which investors were betting.

The dollar index, which measures the currency against six peers, edged up 0.07% to 108.65, after rising and then falling back from its highest since September 2002 at 109.29 on Thursday.

Traders had increased bets that the Fed would opt for broad-based tightening at their July 26-27 meeting after Wednesday’s data showed consumer price inflation rising at the fastest pace. fast for four decades.

But those bets were reduced after Fed Governor Christopher Waller and St. Louis Fed President James Bullard both said they favored another 75 basis point hike for this month, despite the inflation figures.

Fed funds futures currently point to a 31% chance of a 100 basis point hike, up from around 70% before the comments.

Even in hindsight, the dollar index is on track for a third week of gains, up 1.58% from last Friday on both bets for an increasingly aggressive Fed and as concerns regarding a resulting recession are fueling demand for the currency as a safe haven.

“The momentum remains with the US dollar,” said Sean Callow, currency strategist at Westpac, predicting that the dollar index should hit the top 111 in the coming weeks.

“The FOMC will need to remain hawkish both at the July meeting and beyond, building further support for the US dollar yield.”

Against the yen, the dollar eased 0.09% on Friday to 138.81 but was up 2% on the week and touched 139.38 overnight for the first time since September 1998, the yields of the US Treasury widening the gap with their Japanese counterparts.

The Bank of Japan has been unwavering in its commitment to ultra-loose policy to support the economy, and is widely seen as holding stimulus parameters stable at a meeting next week.

The euro remained stable at $1.0019, after bouncing below parity on Thursday for a second day.

The single currency fell to $0.9952 after Italian Prime Minister Mario Draghi offered to resign, but it was rejected by the country’s president.

The euro zone is grappling with a deepening energy crisis as Russia shut down a gas pipeline for regular week-long maintenance, leaving markets jittery over whether it will come back online, with Russia saying it will depend request and penalties.

Despite the uncertainty, the European Central Bank is likely to stick with the quarter-point rate hike it announced for next week, but the outlook is far behind the Fed, supporting dollar strength against the euro.

Meanwhile, the pound edged up 0.12% to $1.1840, after falling to a 28-month low of $1.1761 overnight. It’s down 1.57% since last Friday, heading for its worst week since early May as political unrest casts a shadow over the currency.

The risk-sensitive Australian dollar gained 0.1% to $0.6755, shrugging off data showing a sharper-than-expected decline in economic growth in major trading partner China.

The Aussie fell to a two-year low of $0.66825 on Thursday and is heading for a weekly loss of 1.43%.

(Reporting by Kevin Buckland; Editing by Simon Cameron-Moore)

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