Dollar builds on gains as economy shines in February By Reuters

By Harry Robertson and Rae Wee

LONDON/SINGAPORE – The dollar rose slightly on Wednesday, continuing to trade near six-week highs on the back of strong economic data.

Survey data released on Tuesday showed U.S. business activity unexpectedly rebounded in February to reach its highest in eight months. In the euro zone, a survey-based gauge of activity also surged, hitting a nine-month high.

The signs of economic strength caused traders to pencil in further interest rate hikes from the Federal Reserve on Tuesday, driving the U.S. stock index 2% lower and the dollar up 0.3%.

On Wednesday, the euro was down 0.15% at $1.063, just above Friday’s six-week low of $1.061.

(Graphic: Euro, https://fingfx.thomsonreuters.com/gfx/mkt/myvmokllrvr/Screenshot%202023-02-15%20084338.png)

The was up 0.13% at 104.28, not far off the six-week high of 104.67 hit at the end of last week.

Investors’ focus now turns to the release of the minutes from the Fed’s latest meeting later on Wednesday, which could offer more insight into policymakers’ plans.

“We’ve been in this dollar rebound for three weeks. The fundamental driver essentially is the market repricing Fed hikes higher,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

“That’s the near-term momentum and that’s the path of least resistance,” Tan said. “I wouldn’t fight it for now… a further extension of this rally is likely in my view.”

A blockbuster U.S. employment report in early February sparked the rebound in the dollar, which has been helped along by a series of strong data releases.

(Graphic: US non-farm payrolls, https://fingfx.thomsonreuters.com/gfx/mkt/zgvobnmazpd/Screenshot%202023-02-22%20082146.png)

Traders on Wednesday were projecting the Fed’s main interest rate would rise to peak around 5.35% in July, according to Refinitiv data based on derivative market pricing.

At the start of February, expectations were for a peak just below 5%. The Fed has raised rates to a range of 4.5% to 4.75%, from 0% to 0.25% as recently as March 2022.

Investors have also increased their ECB rate bets. Deutsche Bank (ETR:) on Tuesday said it now expects rates to rise to 3.75%, having previously expected them to rise to 3.25% from their current level of 2.5%.

The dollar slipped 0.2% to 134.75 yen, after rising more than 0.5% on Tuesday.

The pound was down 0.26% to $1.208. It climbed 0.6% on Tuesday after British survey data also came in strong.

Themos Fiotakis, head of FX strategy at Barclays (LON:), said he still expcts the dollar to fall by the end of the year.

“We are closer to the peak than anything in terms of U.S. rates. The story is easing. The Chinese economy is doing better with the reopening,” he said.

Fiotakis said these factors should help push the dollar down and the euro up to $1.12 by the end of the year, although he said a fall to $1.04 was possible in the short-term.

The New Zealand dollar was last up 0.19% at $0.623, after having risen to an intra-day high of $0.625 earlier in the session following a hawkish rate hike from the Reserve Bank of New Zealand.