Dollar rises after biggest drop in 2 months, Fed’s Powell confirms hawk outlook

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May 18, 2022 • 13 minutes ago • 2 minutes read • Join the conversation

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LONDON – The US dollar rose higher on Wednesday, a day after posting its biggest one-day drop in more than two months, after US Federal Reserve head Jerome Powell took a more aggressive tone as the central bank struggled to rein in rising inflation hold.

Powell promised the US central bank would raise interest rates as high as necessary, including rates above neutral, to end a rise in inflation that he said was threatening the bottom line of the economy.

The neutral rate is the level at which economic activity is not simulated or constrained and is widely expected to be somewhere in the vicinity of 3.5% by mid-2023.

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“It’s a strong reminder to the market that the Federal Reserve is going to raise interest rates, probably at a very accelerated pace, to regain their credibility on the inflation front,” said Jane Foley, head of FX at Rabobank.

“The aggressive Fed is why sentiment seems a little more fragile this morning than yesterday.”

At 1055 GMT, the US dollar index was up 0.3% to 103.57, having previously reached a two-week low following Tuesday’s 0.9% decline. It hit a two-decade high above 105 last week.

The euro briefly fell below $1,0500, reversing an earlier gain to a week-long high, a day after European Central Bank policymaker Klaas Knot said a 50 basis point rate hike in July was possible if the euro. inflation increased.

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Knot is one of the more aggressive ECB members, Commerzbank analysts noted, adding that his position did not necessarily reflect the majority stance in the ECB’s governing body.

“Nevertheless, with this comment, Knot opens up a new line of attack for the ECB’s hawks,” Commerzbank analyst Ulrich Leuchtmann said in a note.

On Wednesday, more ECB policymakers clamored for interest rate hikes in the coming months. Money markets now expect up to 108bp in rate hikes for the remainder of the year.

Finland’s central bank chief Ollie Rehn said the ECB would need to move out of negative interest rates relatively quickly to avoid unanchored inflation expectations, while Spain’s Pablo Hernandez de Cos said interest rates are likely to start rising early in the third quarter. to rise.

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The euro was not immediately affected by the comments or by data showing consumer price inflation reached a record high of 7.4% in April, although it was revised down from a preliminary estimate of 7.5%.

The single currency was the last 0.3% lower at $1.05175.

The pound fell to $1,23725 after data showing UK inflation rose 9% last month to its highest annual rate since 1982, putting pressure on policymakers.

The Australian dollar fell 0.1% to $0.7025 as Australian wage growth rose only a fraction last quarter, prompting investors to reverse their bets on bigger rate hikes.

Cryptocurrency markets have been fairly calm after last week’s turmoil. Bitcoin fell about 2% and last traded a fraction below $30,000. Ether held over $2,000 but was still down just over 2%.

(Reporting by Samuel Indyk and Alun John; editing by Simon Cameron-Moore, David Clarke and David Evans)

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Amanda Peterson: Amanda is an economist turned blogger who provides readers with an in-depth look at macroeconomic trends and their impact on businesses.

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