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Saturday, May 21, 2022
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Dollar firms slightly on hawkish Fed

Fed hikes rates

Markets are now pricing in a small chance the Fed hikes rates this week, though the expectation is for a first move to 0.25% in March and three more to 1.0% by year end

The dollar firmed slightly on Monday with traders nervous about tensions in Ukraine and a possible hawkish tilt by the Federal Reserve at a much-watched meeting this week, while bitcoin lay near a six-month low, a further sign of the ‘risk off’ mood.

The euro shed 0.19% to 1.1319 and the dollar added 0.1% on the safe-haven yen with one dollar worth 113.8 per yen, though the Japanese currency was still near its recent top of 113.47.

Markets are largely worrying and waiting, focussing on the FOMC and Russia-Ukraine tensions, said Moh Siong Sim, currency strategist at Bank of Singapore, referring to the rate-setting Federal Open Market Committee, which kicks off its two-day meeting this week.

We’ve had a bit of dollar consolidation, though there are a lot of cross currents and that’s why it’s a mixed picture, he said adding there is a bit of flight to safety in terms of yen strength and gold strength.

Edgy markets are now even pricing in a small chance the Fed hikes rates this week, though the overwhelming expectation is for a first move to 0.25% in March and three more to 1.0% by year end.

We consider the higher risk is the FOMC’s statement portrays an urgency to act soon, likely in March, in the face of very high inflation. The urgency could culminate in a decision to abruptly stop quantitative easing by mid-February, said analysts at Commonwealth Bank of Australia in a note.

A bullish statement and/or a faster end to the QE programme could even encourage markets to price a risk of a 50bp rate hike in March, they added, saying they thought this would lead to a knee-jerk reaction higher in the dollar.

The dollar index was 0.11% higher on Monday.

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