SINGAPORE: The dollar was on top on Monday, hovering near a seven-week high, after a slew of strong US economic data bolstered views that the Federal Reserve will have to raise interest rates further and longer.
The dollar index, which measures the U.S. currency against six major peers, was at 105.17, just below the seven-week peak of 105.32 it hit on Friday after hotter-than-expected data. The index is up 3% for February and is poised to snap a four-month losing streak.
The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred gauge of inflation, rose 0.6% last month after rising 0.2% in December, according to data on Friday.
Consumer spending, which accounts for more than two-thirds of US economic activity, jumped 1.8% last month, according to the Commerce Department. Economists polled by Reuters had forecast a 1.3% rise in consumer spending.
Rodrigo Catril, senior currency strategist at National Australia Bank, said the data showed the US economy was too hot at the start of the year, increasing the urgency for further Fed tightening in the coming months.
“The reality is that the US economy started 2023 in a stronger position than many of us expected.”
The market is now pricing US interest rates to peak at 5.4% in July and remain above 5% for the rest of the year.
However, Fed policymakers speaking on Friday stopped short of reversing last year’s jumbo rate hikes, suggesting that for now central bankers are content to stick with gradual tightening despite signs that inflation is not cooling as much as they had hoped. .
The rupee is making significant progress against the US dollar
The Fed is expected to raise rates by 25 basis points at its March 21-22 meeting, although some analysts see the possibility of a 50 basis point increase if inflation remains high and growth remains strong.
“We now believe it’s a much closer call for officials to hike by 50 basis points in March than our previous guess of 25 basis points,” said Kevin Cummins, chief economist at NatWest Markets.
“We put the odds at about 60% that the FOMC raises by 50 bps.” The data also led markets to raise the likely top rates for the European Central Bank and the Bank of England.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 0.4 basis points at 4.809%, just shy of the three-month high of 4.840% it hit on Friday.
The closely watched portion of the U.S. Treasury yield curve that measures the gap between two- and 10-year Treasury yields, seen as an indicator of economic expectations, was at -87.7 basis points.
The euro rose 0.08% to $1.0554, breaking from a seven-week low hit on Friday. Sterling last traded at $1.1959, up 0.13% on the day.
The Japanese yen gained 0.15% to 136.26 per dollar, after slipping to a more than two-month low of 136.58 earlier in the session.
The Australian dollar rose 0.12% to $0.673, while the kiwi rose 0.13% against the greenback to $0.617.