Dollar gains traction as Fed speakers warn of risks from inflation

The dollar held gains near a two-week high in early Asian trade on Wednesday as a hotter-than-expected inflation report and hawkish comments from Federal Reserve officials fuelled bets the central bank will raise rates next month.

The US dollar index, which measures the greenback’s strength against a basket of six currencies, was steady at 102.22, closing in on its highest level since Oct 28.

The gauge traded up 0.5% on Tuesday after data showed US consumer prices increased by more than expected in October amid higher costs for food and accommodation.

“The rates market isn’t simply pricing another hike,” said Chris Weston, head of research at Pepperstone Group Ltd in Melbourne. “It’s questioning how restrictive US monetary policy may ultimately need to become, and that’s a far more consequential debate for risk assets.”

The dollar held onto its gains against its major peers in early Asian trade. The euro and the British pound were flat at US$1.1168 and US$1.3345, respectively. Against the yen, the US dollar was unchanged at 158.715 yen. The Australian dollar was up 0.1% at US$0.6870, edging back from a seven-month low, while the New Zealand dollar was flat at US$0.5605.

Comments from voting members of the Federal Reserve’s rate-setting committee signalling unease over high inflation have firmed expectations for further rate hikes, prompting traders to all but abandon bets that the US central bank will stand pat at its next policy meeting, which concludes on Dec 9.

Fed funds futures now imply a 91.9% chance of a 25-basis-point rate hike next month, up from 84% a day earlier, according to CME Group’s FedWatch tool. Markets have fully priced out the possibility of a pause and see a 9.1% chance of a larger 50-basis-point move, while assigning better-than-even odds to a second hike in January.

The yield on the US 10-year Treasury bond was up 13.8 basis points at 4.996%.

In cryptocurrencies, bitcoin was down 0.3% at US$73,566.45 while ether was 0.5% lower at US$2,044.61, both trading near three-month lows.