Dollar hits two-month high as Fed eyes earlier rate hikes; kiwi climbs

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imageEconomy1 hour ago (Jun 17, 2021 15:55)

© Reuters. FILE PHOTO: A man counts U.S. dollar banknotes at a currency exchange shop in Beirut, Lebanon March 2, 2021. REUTERS/Mohamed Azakir/File photo

By Saqib Iqbal Ahmed and Elizabeth Howcroft

NEW YORK (Reuters) – The dollar extended its gains against a basket of currencies on Thursday, a day after the U.S. Federal Reserve surprised markets by signalling it would raise interest rates and end emergency bond-buying sooner than expected.

Fed officials on Wednesday projected an accelerated timetable for rate increases, began talks on how to end emergency bond-buying, and said that the COVID-19 pandemic was no longer a core constraint on U.S. commerce.

A majority of 11 Fed officials pencilled in at least two quarter-point rate increases for 2023, adding in their statement that they would keep policy supportive for now to encourage a labour market recovery.

The dollar index, which tracks the greenback against six major currencies, was up 0.38% at 91.75, its highest since mid April. That rise follows a nearly 1% jump on Wednesday, the largest daily percentage gain since March 2020.

“The (FOMC) meeting doesn’t change our view, but reaffirms it,” said John Doyle, vice president of dealing and trading at FX payments firm Tempus Inc.

“We thought that the dollar was modestly undervalued against most of its G10 counterparts,” Doyle said.

For some, including Goldman Sachs (NYSE:GS) and Deutsche Bank (DE:DBKGn), the Fed’s changed tune prompted an abandoning of calls to short the dollar.

“We continue to forecast broad U.S. Dollar weakness, driven by the currency’s high valuation and a broadening global economic recovery,” analysts at Goldman Sachs wrote in a note on Wednesday.

“However, more hawkish Fed expectations and the ongoing tapering debate look likely to be a headwind to Dollar shorts over the near term,” the analysts, who closed their recommendation to go long the euro against the dollar.

With equity markets hurting, the Australian dollar – seen as a proxy for risk appetite – was down 0.54% at 0.7568, its lowest since April 1..

Australia also had upbeat data, with job creation beating expectations in May and unemployment diving to pre-pandemic lows.

The dollar was 0.27% higher against the Norwegian crown after Norway’s central bank kept its key interest rate unchanged as expected, but said an increase was likely in September and steepened its trajectory of subsequent rate rises as the economy recovers from the effects of COVID-19.

The stronger dollar sent sterling below $1.40 to a fresh 5-week low.

Elsewhere, bitcoin was trading at $38,824.41, little changed on the day.

(Graphic: USD – https://fingfx.thomsonreuters.com/gfx/mkt/yxmpjabeovr/USD.png)

Dollar extends gains on Fed boost

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