Powell’s hawkish testimony keeps dollar elevated

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SINGAPORE — The dollar was perched near a three-month high on Thursday as Federal Reserve Chair Jerome Powell’s message that interest rates would have to go higher and possibly faster to tame inflation dominated sentiment and underpinned the U.S. currency.

In the second day of his testimony to Congress on Wednesday, Powell reaffirmed his hawkish message, though striking a cautious note that debate on the scale and path of future rate hikes was still underway and would be data-dependent.

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That caused the U.S. dollar to pause its sharp rally from earlier in the week, retreating from close to a three-month top against the Japanese yen to last stand at 136.97.

The euro and sterling similarly edged away from their multi-month lows, steadying at $1.0547 and $1.18435, respectively.

“Powell conceded that the March decision is data-dependent,” said Thierry Wizman, Macquarie’s global FX and rates strategist. “The question facing us, therefore, is whether January’s economic reacceleration was a blip or a trend.”

The U.S. dollar index was largely steady, off just 0.01% to 105.62, and remained near a three-month peak of 105.88 hit in the previous session, having extended Tuesday’s 1.3% surge, its biggest daily jump since last September.

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A slew of strong economic data out of the United States in previous weeks, pointing to persistent inflationary pressures, led to Powell saying on Tuesday that the Fed will likely need to raise interest rates more than expected, and that it was prepared to move in larger steps.

Traders scrambled to reprice a more aggressive pace of interest rate hikes in the wake of Powell’s comments, with Fed funds futures now implying a near-70% chance the Fed will raise rates by 50 basis points this month, up from just about 9% a month ago.

U.S. rates are also seen holding above 5.5% through to the end of the year.

“While we’re quite confident that last year’s elevated inflation peak won’t be exceeded, the possibility of inflation remaining stickier for longer does suggest that the Fed will have to keep hiking rates for longer than previously thought,” said Rick Rieder, BlackRock’s chief investment officer of global fixed income.

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Conversely, the Bank of Canada on Wednesday left its key overnight interest rate on hold at 4.50%, becoming the first major central bank to suspend its monetary tightening campaign.

The Canadian dollar stood at 1.3810 per U.S. dollar on Thursday, after having weakened to a more than four-month low in the previous session following the decision.

The Australian dollar was likewise kept under pressure for a similar reason, though was last 0.02% higher at $0.6591 in Asia trade.

Reserve Bank of Australia Governor Philip Lowe on Wednesday said the central bank was closer to pausing on rate hikes and suggested a halt could come as soon as April.

“Lowe seemed open to a growing divergence in the path of monetary policy between Australia and the U.S.,” said Belinda Allen, senior economist at Commonwealth Bank of Australia.

Elsewhere, the kiwi rose 0.09% to $0.61105, having slumped to a near four-month low in the previous session.

The Chinese offshore yuan languished near the key psychological level of 7 per dollar, and was last lower on the day at 6.9765 following official data that showed China’s annual consumer inflation slowing down in February, suggesting slow consumption and economic recovery.

(Reporting by Rae Wee; Editing by Sonali Paul & Shri Navaratnam)