Dollar Stumbles as Safety Trade Fades, but Fed Focus Will Limit Losses

The dollar’s bright start to the week faded Tuesday, as easing Russia-Ukraine tensions coaxed investors out from the safe-haven arms of the greenback, but the potential for fresh clues on the Fed frontloading rake hikes will keep losses in check.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.37% to 95.99, as the flight to safety waned after Russia reportedly pulled some of its troops back from the Ukraine border. 

But fresh hopes for a deescalation in tensions won’t keep the dollar pinned down for long. The Fed’s minutes from the January meeting, set to be released on Wednesday, will return focus to monetary policy, and the prospect of aggressive rate hikes ahead. 

“[W]e expect the narrative around frontloading of tightening by the Federal Reserve to put a floor under the dollar in the near term even if the geopolitical risk is priced out,” ING said in a note.

The minutes will arrive just as bets on the Fed frontloading rate hikes by increasing its benchmark interest rate by 50 basis points at its meeting next month continue to growth.

The recent jump in rate hike expectations were spurred by a red-hot inflation showing prices pressure continue to trend at multi-decade highs, and hawkish remarks from the St. Louis Fed President James Bullard.“I do think we need to front-load more of our planned removal of accommodation than we would have previously. We’ve been surprised to the upside on inflation. Bullard told CNBC’s Steve Liesman during an interview earlier this week.

The St. Louis Fed president, who tends to lean more hawkish on monetary policy, previously called for interest rates to be increased by a full percentage point by July 1.

“I’d like to see 100 basis points in the bag by July 1,” Bullard said in an interview with Bloomberg last week.  “I was already more hawkish but I have pulled up dramatically what I think the committee should do.”

Markets were quick to take note, with the 2-year Treasury yields, which are heavily influenced by the Fed’s policy action, pricing in a 100-basis-point hike.

The minutes, however, predated the hawkish remarks from Bullard, and the red-hot inflation report that led to a repricing of aggressive Fed rate hike bets, so may offer little insight.

“[T]here is a limit to which any policy inferences drawn from the January meeting’s minutes may be relevant to formulating expectations for the March meeting, Scotiabank Economics said. 

“The minutes will be significantly stale on arrival since we’ve since had a blow-out jobs report (+467k in January with +709k of revisions to the prior two months) and a stronger-than-expected CPI inflation report (7.5% y/y).”


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