(Updates at 1150 GMT)
LONDON/SINGAPORE, Jan 16 (Reuters) – The dollar rallied
on Tuesday as investors tempered their expectations for a March
rate cut from the Federal Reserve, while the pound and yen
dropped as inflationary pressures subsided.
Against a basket of currencies, the dollar rose
0.51%to 103.16, around a one-month high. It gained 0.2%
overnight in subdued trading during a U.S. public holiday on
The euro fell 0.54% to $1.0892, set for its
steepest one-day percentage drop in two weeks.
Comments from European Central Bank officials downplaying
the idea of early rate cuts overshadowed the outlook for
borrowing costs globally.
The ECB’s Joachim Nagel on Monday said it was too early to
talk about cuts, and his Austrian colleague Robert Holzmann said
markets should not bank on borrowing costs falling this year.
Other policymakers on Tuesday maintained a cloud of uncertainty
over the timing of the moves.
“The hawkish ECB commentaries last night have fuelled
concerns that market pricing for the Fed rate path may also be
aggressive,” said Charu Chanana, head of currency strategy at
Saxo in Singapore.
“Some safe-haven demand also likely to be at play with Red
Sea disruptions escalating.”
U.S. bond yields rose on Tuesday after Monday’s holiday,
with the 10-year up 6 basis points at 4.011%,
supporting the dollar.
Jane Foley, head of FX strategy at Rabobank, said a bleak
outlook for Germany’s economy, which shrank 0.3% last year, was
likely another factor weighing on the euro.
“With budget cuts coming, it doesn’t look good for the
German economy in terms of growth for the year ahead,” she said.
ECB data on Tuesday showed consumer expectations of euro
zone inflation three years ahead fell sharply in a November poll
to 2.2%, from 2.5%.
STERLING AND YEN FALL
Sterling was last down 0.71% at $1.2637 after data
showed British wage growth slowed sharply in the three months
through November, supporting the idea that the Bank of England
will cut rates heavily this year.
The dollar was 0.58% higher against the Japanese yen
, at 146.65 yen to the dollar, around a five-week high.
The yen fell after figures showed Japan’s wholesale price index
stayed flat in December from a year ago, with the rate of change
slowing for the 12th straight month.
The Australian dollar, which tends to fall when
investors are worried about taking on risk in the market, was
down 0.87% at $0.6603.
Investors awaited comments later on Tuesday from the Fed’s
Christopher Waller, whose dovish turn in late November helped to
trigger a blistering year-end market rally.
Markets are pricing in a 69% chance of a 25 bp cut in March
from the Fed, versus 77% a day earlier and 63% a week earlier,
the CME FedWatch Tool showed. Traders expect cuts of roughly 160
bps this year.
Investors were also monitoring news from the Red Sea. An
official from the Iran-aligned Houthi movement said on Monday
the group will expand its targets to include U.S. ships, and
would maintain attacks after U.S. and British strikes on its
sites in Yemen.
In Iowa, Donald Trump asserted his command over the
Republican party with a resounding win on Monday in the first
2023 presidential contest for the party.
Rabobank’s Foley said the result could be weighing on the
euro “at the margin” as investors begin to think about what a
more isolationist America under a potential Trump presidency
might mean for Europe.
(Reporting by Harry Robertson in London and Ankur Banerjee in
Singapore; Editing by Barbara Lewis and Bernadette Baum)