Dollar jumps to one-month high as rate-cut bets fall

LONDON/SINGAPORE :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 per centto 103.16, around a one-month high. It gained 0.2 per cent overnight in subdued trading during a U.S. public holiday on Monday.

The euro fell 0.54 per cent 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 per cent, supporting the dollar.

Jane Foley, head of FX strategy at Rabobank, said a bleak outlook for Germany's economy, which shrank 0.3 per cent 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 per cent, from 2.5 per cent.

STERLING AND YEN FALL

Sterling was last down 0.71 per cent 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 per cent 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 per cent 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 per cent chance of a 25 bp cut in March from the Fed, versus 77 per cent a day earlier and 63 per cent 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.