The US dollar remained elevated in early European trade on Thursday, despite a 0.1% drop against a basket of six other currencies tracked by the Dollar Index, trading at 105.543. The dollar remained near its three-month peak of 105.880 from the previous session as Federal Reserve Chair Jerome Powell reiterated the need for further interest rate hikes to tackle inflation.
Powell returned to Capitol Hill on Wednesday for the second day of his semi-annual testimony, in front of the House Financial Services Committee. He emphasized that the US central bank will likely need to raise interest rates more than expected and possibly in larger steps as recent economic data has been stronger than expected. The data indicates persistent inflationary pressures.
Powell acknowledged that the debate over future rate hikes, including the expected increase in March, was still underway and would be data-dependent. Therefore, the official jobs report scheduled for Friday is in focus, especially after last month’s blockbuster report. The US jobless claims data released later on Thursday will act as a precursor.
The US 2-year Treasury yield has risen above 5.5%, hitting a 16-year high, while the 2-10-year curve has inverted close to 110 basis points. These developments have led to growing fears of a Fed-induced recession. The ING analysts noted that a broad decline in the US dollar cannot be expected until the disinflation story returns, and acute US yield curve inversion breaks by the short end coming lower.
The EUR/USD rose by 0.1% to 1.0555, while the GBP/USD also rose by 0.1% to 1.1848, both recovering from their multi-month lows after the dollar edged lower. The USD/JPY fell by 0.4% to 136.87, retreating from a near three-month high. The AUD/USD rose by 0.4% to 0.6612, and the USD/CNY rose by 0.3% to 6.9734, close to the widely-watched 7-per-dollar level after weaker-than-expected inflation data showed a hesitant Chinese economic recovery. The USD/CAD fell by 0.1% to 1.3794, the day after the Bank of Canada suspended its monetary tightening, keeping its key overnight interest rate on hold at 4.50%.
In conclusion, the US dollar continues to remain strong, and Powell’s emphasis on interest rate hikes to tackle inflation has further strengthened it. The US job report and jobless claims data are in focus, while the 2-10-year curve has inverted, prompting fears of a Fed-induced recession. The ING analysts have noted that the disinflation story needs to return before a broad decline in the US dollar can be expected.