Dollar ticks up as case for March Fed hike grows

The dollar ticked up on Monday amid bets that U.S. inflation will bolster the case for higher interest rates, while the European Central Bank’s dovish stance on rising prices weighed on the euro.

The dollar had faced selling late last week after a weaker-than-expected headline U.S. job-creation figure squeezed traders out of long dollar positions.

But analysts said better-than-expected unemployment numbers and U.S. inflation figures, which are expected to show headline CPI at a red-hot 7% year-on-year on Wednesday, make a case for interest rates to rise sooner rather than later.

Traders have priced a more than 90% chance of a rate hike in March according to CME’s FedWatch tool. Investors will be waiting for clues from Federal Reserve chair Jerome Powell and governor Lael Brainard who will testify before Senate committees this week.

In midday trading in Europe, the dollar index, which measures the greenback against major peers, was up 0.13% at 95.914.

The euro was down 0.33% against the dollar at $1.13250 with investors sticking to their view that the ECB is still far behind the Fed in the tightening cycle despite data showing euro zone inflation jumped to 5% in December.

ECB board member Isabel Schnabel said on Saturday that rising energy prices may force the central bank to stop “looking through” high inflation and act to temper price growth, but her comments were largely ignored on currency markets.

For Kit Juckes, a strategist at Societe Generale, investors still generally believe it is too early in the cycle for the central bank to tighten its policy.

“I think it’s a story for the second half of the year and next year”, he said, adding that Schnabel’s comments could nevertheless be seen as a “warning” on the direction of travel.

The euro also hit its lowest level against the pound since February 2020 amid bets that the Bank of England (BOE) is likely to be hiking in tandem with the Fed.

Sterling was however weaker against the dollar, down 0.15% at $1.3570 but [GBP/]

The greenback ticked down 0.25% against the yen at 115.22 but still not far from last week’s five-year high of 116.35.

The Australian dollar wobbled around $0.7183, finding a little help from a lift in Aussie bond yields.

Cryptocurrencies have faced pressure from broad selling in risk assets at the start of this year, but were steady in Asia after bitcoin managed to hold support at $40,000 through weekend trade.

Bitcoin edged lower, down about 1% at $41,408 and ether lost close to 2% at $3,090.

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