Dollar Holds Below 2-Week Highs

On Wednesday, the dollar remained below two-week highs as traders awaited the release of minutes from the Federal Reserve’s December meeting, with rising expectations of a rate hike as early as March, keeping the yen pinned near a five-year low.

The minutes due at 1900 GMT may highlight U.S. policymakers’ newfound sensitivity to inflation and willingness to act. By March, markets have increased their bets on a quarter-point rate increase. They will be fully priced in by May. Moreover, the dollar index held steady at 96.269 against a basket of rival currencies after hitting a two-week high of 96.462 the previous session.

On Tuesday, Neel Kashkari, the Minneapolis Federal Reserve Bank president, said that the U.S. central bank would need to raise interest rates twice this year to address persistently high inflation.

The partial U.S. labor data on Wednesday and non-farm payrolls on Friday will watch for clues about the trajectory of borrowing costs.

Currencies

Investors braced for the Federal Reserve to raise interest rates sooner to combat high inflation. Hence, U.S. yields dipped slightly on Wednesday after surging to pre-pandemic levels on Tuesday.

After reaching a five-year high of 116.35 on Tuesday, the USD/JPY rose 0.2 percent to 115.94. The Bank of Japan was one of the last major central banks to sanction policy tightening.

The EUR/USD fell 0.1 percent to 1.1300, just above a two-week low. The GBP/USD rose to 1.3535. Moreover, the risk-sensitive AUD/USD fell to 0.7236. Fed Funds futures indicate that interest rates will begin to increase in May. Still, given the strength of the U.S. economic recovery, expectations are growing that the central bank will act sooner.

After doubling the pace of tapering purchases on December 15, the Fed is on track to end its asset-buying program in March. This potentially paved the way for rate hikes. The USD/PLN fell to 4.0398 after Poland’s central bank raised its benchmark interest rate by 50 basis points on Tuesday. It matched the December increase to combat rising inflation.