Title: Dollar catches breath as Fed officials leave market pondering over rates path

Jul 15, 2022 02:05AM ET

By: AnalysisWatch

The dollar hovered below a near two-decade high in Asian trading on Friday, having slipped overnight after two Federal Reserve policymakers said they favoured a smaller rate rise than the 100 basis points (bps) that investors were betting on.

The dollar index, which measures the currency versus six counterparts, edged 0.03% higher to 108.60, after reaching and then falling back from the highest since September 2002 at 109.29 on Thursday.

Traders had ramped up bets that the Fed would go for a super-sized tightening at their July 26-27 meeting after data on Wednesday showed consumer price inflation racing at the fastest pace in four decades.

Fed funds futures currently indicate a 36% chance of a 100 bps increase, down from around 70% before the comments.

Even with the pullback, the dollar index is on track for a third winning week, up 1.58% from last Friday on both bets for an increasingly aggressive Fed and as worries about a resulting recession fuelled demand for the currency as a safe haven.

Against the yen, the dollar was flat at 138.98, keeping it on track for a 2.1% gain this week. It touched 139.38 overnight for the first time since September 1998 as U.S. Treasury yields widened the gap to their Japanese counterparts.

The euro was flat at $1.00245, after bouncing back from below parity on Thursday for a second day.

The single currency dipped as low as $0.9952 after Italian Prime Minister Mario Draghi offered to resign, but that was rejected by the country's president.

Despite the uncertainty, the European Central Bank is likely to stick the quarter-point rate increase it has flagged for next week, but the outlook trails well behind the Fed, supporting the dollar's strength versus the euro.

Meanwhile, sterling trod water at $1.18265, after slumping to a 28-month low of $1.1761 overnight. It is down 1.71% since last Friday, heading for its worst week since early May as political turmoil casts a shadow over the currency.