Dollar edges up as “upside risks to FOMC policy remain”

08 Dec 2022

The Dollar reversed some of Wednesday’s declines on Thursday as investors focused on the Fed policy outlook with fears mounting that high-interest rates could lead to a recession.

The U.S. Dollar index – measuring the currency against six major peers – rose 0.19% to 105.33 in Asian trading, rallying after a 0.42% drop overnight, the first fall since Friday.

Although investors had forecast the Federal Reserve would slow down its monetary tightening pace, recent buoyant U.S. employment, services and factory data have fuelled investor uncertainty over the policy outlook, Reuters reports.

Money markets have priced in a 91% chance the Federal Open Market Committee (FOMC) will hike rates by 50 basis points on 14th December, while just 9% forecast another 75-basis point rise. As it stands now, rates are seen peaking in May at just under 5%.

“Uncertainty about the inflation outlook suggests the risk remains high that the FOMC will keep policy at a restrictive level for longer and, in turn, drag the economy into a deeper downturn,” said Commonwealth Bank of Australia strategist Carol Kong. 

“The FOMC may step down the pace of its rate hikes to 50bp next week, but unless inflation decelerates consistently, upside risks to FOMC policy remain.”

Furthermore, long-term Treasury yields plummeted close to a three-month low of 3.402% overnight but rallied to 3.46% in Tokyo, the Reuters report adds.

Sensitive to U.S. yields, Dollar-Yen rose 0.37% to 137.06, following an overnight drop of 0.34%. This followed the pair plunging to its lowest point since August last week of 133.62.

Elsewhere, the Euro remained flat at $1.0505, whilst the Pound edged down 0.18% to $1.2190 at the time of writing.

The single currency has moved up recently on indications Europe’s economic downturn may not be as bad as first thought. The European Central Bank is reviewing policy on 15th December, and the Bank of England is setting policy on the same day.