Dollar dips as traders see rate hikes fully priced in

Dollar dips as traders see rate hikes fully priced in

Traders reckon rate hikes are now priced in to the dollar.

SYDNEY, January 14, Reuters - The dollar went for its largest weekly fall in eight months on Friday, as investors trimmed long positions and deemed that several U.S. rate hikes this year are fully priced in.

In a week where data showed the U.S. inflation was at its hottest since the early 1980s, selling has forced the dollar through key support against the euro and traders seem content to lighten their bets until a clearer trend emerges.

The dollar index is down 0.9% for the week, on course for its largest weekly percentage fall since May and is poised to halt a rally that has lasted about six months. The index was last held at 94.849 in quiet Asia trade.

The euro is up more than 0.8% for the week and has been out of a range since November. It doesn't face strong chart resistance until the price of $1.1525 at $1.1457.

The yen has rallied by 1% over the week and pushed back through 115 to the dollar, last holding at 114.13.

The moves have come while the U.S. interest rate futures have all but locked in four hikes this year. Longer-end yields have fallen slightly on hawkish comments from Federal Reserve officials about reducing the bank's balance sheet.

The investors seem to be signalling that ending quantitative easing, hiking rates four times and beginning quantitative tightening all in the space of nine months is so aggressive that it will limit scope for hikes further out, said Derek Halpenny, head of global markets research at MUFG.

In a note to clients, Halpenny said that it reinforced the belief that peak Fed funds will be below 2%.

We will need to see data on the economy that convinces the market of stronger growth. That could see thinking on the terminal fed funds rate shift higher. That would be the catalyst for renewed dollar strength. The Antipodean currency has been roused from their ranges and will have traders looking at labour and inflation data in both countries this month for anything that might spark further shifts in central bank rhetoric.

The New Zealand dollar is up 1.3% for the week and is above its 50 day moving average of $0.6861. This week, the Aussie broke above the stubborn resistance around $0.7276 but fell to that level on Friday.

The outlook for the AUD will be underpinned by further evidence of strength in the labour market, said Jane Foley, a potential positive shift in Reserve Bank of Australia rhetoric.

We expect the AUDUSD to move higher in H2 2022 to $0.74. The pound has been forging ahead, despite a political crisis that threatens Prime Minister Boris Johnson's position on confidence that Britain can withstand a wave of COVID 19 infections and that rate hikes could begin next month.

The pound was above its 200 day moving average on Thursday and is heading for a fourth consecutive weekly gain of more than 0.5%. It was the last time it bought $1.3707.

The Bank of Korea raised its benchmark interest rate by 25 basis points to 1.25%, as expected, and the South Korean won was expected to hang on to a weekly rise of about 0.8%, according to a report by the Bank of Korea on Friday.

China's yuan has gained in value on the dollar boosted by growing expectations of policy easing to soften the landing of a slowing economy. Trade data is due to be released around 0200 GMT.

The Canadian dollar fell from a two-month high as oil prices went down and the Swiss franc fell to a ten-week peak of 0.9093 per dollar.