Dollar Climbs on Rate Hike Expectations; Sterling Weighed by Weak

By Peter Nurse

Investing.com – The U.S. dollar soared in early European trade Monday, especially against the Japanese yen, as red-hot U.S. inflation data lifted Treasury yields at the start of a busy week for central banks.

At 2:50 AM ET (0650 GMT), the , which tracks the greenback against a basket of six other currencies, traded 0.4% higher at 104.430, climbing to the highest level in four weeks.

The dollar’s strength was shown most vividly against the Japanese yen, with up 0.3% to 134.79, having earlier climbed to 135.16, its highest since October 1998.

This follows Friday’s for May rising to a new four-decade high of 8.6% on the year. This has raised the chances that the will need to extend its series of 50bp rate hikes well into the third quarter and even potentially opening the door to a larger 75bp move at Wednesday’s policy-setting meeting.

The benchmark U.S. yield touched 3.2% early on Monday, having gained nearly 12 basis points on Friday, while the confirmed earlier Monday it would buy Japanese government bonds on Tuesday as part of its policy to keep benchmark yields close to its 0% target.

The BoJ meets on Friday and its move to buy JGBs on Tuesday suggest that it is very likely to stick to its ultra-easy monetary policy stance.

“A phrase starting to be used more broadly amongst the central bank community is the need for ‘more forceful’ monetary tightening to address inflation,” said analysts at ING, in a note. “Central bankers driving real interest rates higher will be a continued headwind for risk assets and for pro-cyclical currencies (especially energy importers). This is a dollar positive environment.”

Elsewhere, fell 0.3% to 1.0486, continuing the weakness it suffered after Thursday’s meeting when the central bank confirmed it will end its long-running bond-buying scheme at the start of next month and start interest rates in July.

“The weak link was peripheral debt markets being left unprotected without sufficient news on anti-fragmentation support packages,” added ING. “But one also sensed that, as a pro-cyclical currency, the euro may not appreciate rate hikes as growth forecasts are cut.”

fell 0.4% to 1.2263, with sterling taking little support from expectations the Bank of England will raise rates once more on Thursday, after the slowed again in April, as and slumped for a second straight month.

fell 0.3% in April, much weaker than the 0.1% growth expected, while for the through April it grew only 0.2% after 0.8% in the previous three-month period.

The risk-sensitive fell 0.4% to 0.7025, while rose 0.4% to 6.7346 after Beijing announced on Sunday three rounds of as it saw new COVID-19 outbreaks.