By Sinéad Carew and Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – The dollar rose on Thursday as U.S. Treasury yields increased and investors eyed hawkish comments from Federal Reserve officials, while the British pound fell as investors were left unimpressed by the UK government’s latest budget.
The greenback rebounded a little after falling in recent weeks as inflation data and Fed policymakers’ remarks had fuelled bets that the U.S. central bank could soon slow the pace of its interest rate hikes.
But at an event on Thursday, St. Louis Fed President James Bullard showed a graphic suggesting that even dovish assumptions would require the central bank’s policy rate to rise to at least around 5%, while stricter assumptions suggest it would be above 7%. The federal funds rate is currently in the 3.75%-4.00% range after a spate of aggressive hikes.
Joe Perry, senior market analyst at FOREX.com and City Index in New York, also pointed to Fed Chair Jerome Powell’s focus on the terminal rate rather than the pace of increases.
While he expects the dollar to go lower in the long term, Perry sees the “opportunity for a bounce to 109.25 or so in the dollar index, and then rolling over and continuing lower.”
“Vice versa in the euro, we could see it pull back to $1.01 and then bouncing higher as well,” he said.
Bullard spoke a day after San Francisco Fed President Mary Daly – until recently one of the most dovish officials – added to doubts about a change of direction from the central bank by saying a pause was off the table.
Brad Bechtel, global head of FX at Jefferies, described Bullard’s presentation as “relatively hawkish” and also noted that the gain in U.S. Treasury yields was also helping the dollar on Thursday.
Also noting sterling’s move on Thursday, Bechtel said investors were concerned by UK finance minister Jeremy Hunt’s budget, which included tax increases and tighter public spending aimed at cooling inflation and restoring the country’s economic reputation.
“The budget had some holes and wasn’t all that impressive from a markets standpoint,” Bechtel said. “They’re plugging a hole by slamming the consumer. You’ve an economy that’s falling and a cost of living crisis, and they’re raising taxes.”
The British pound was last down 0.53% at $1.1850 after earlier falling as much as 1.25% to $1.17645. The euro was up 0.26% against the pound at 87.43 pence.
Against the dollar the euro was last down 0.30% at $1.0364 after dropping as much as 0.86% earlier in the session. Earlier this week it had briefly touched $1.048, its highest level since July.
The dollar index, which measures the greenback against six major peers, was recently up 0.38% at 106.687. After hitting a 20-year high in late September, the index had lost more than 8% when it touched its most recent intraday low on Tuesday.
Against the Japanese yen, the greenback was last up 0.44% at 140.1650 after falling earlier in the session. At its peak on Thursday it had risen 0.83%.
The Aussie dollar was down 0.82% at $0.6682, while the Kiwi was down 0.46% to $0.6121.