Dollar falls to record low against euro, yen as rate hikes fully priced in

Dollar falls to record low against euro, yen as rate hikes fully priced in

Rate hikes are now priced in to the dollar, according to traders.

SYDNEY, January 14, Reuters -- The dollar went for its biggest weekly fall in more than a year 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 to break up with key support against the euro and yen and traders seem content to lighten their bets until a clearer trend emerges.

The dollar index fell by about 1.14% for the week, on course for its largest weekly percentage fall since December 2020 and will stop a rally that has lasted about six months. The index was down about 0.20% at 94.654 at the end of the day.

The euro is up more than 1% for the week, and has punched out of a range it held since November 11th, hitting the highest since Nov. 11th at $1.1483. It doesn't face strong resistance until $1.1525.

The dollar has fallen 1.53% against the yen over the week, its worst showing since June 2020, and pushed as low as 113.64 for the first time since Dec. 21.

The safe-haven yen has profited from a slide in global stocks, while the Bank of Japan is deliberating how it can start telegraphing an eventual rate hike.

The dollar's doldrums 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 appear 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 prompt further shifts in central bank rhetoric.

The New Zealand dollar is up 1.46% for the week and is above its 50 day moving average of $0.6861. The Aussie broke above the stubborn resistance around $0.7276 this week, but retreated to around that level on Friday.

The outlook for the AUD will be underpined by more evidence of strength in the labour market, according to Jane Foley, a potential positive shift in Reserve Bank of Australia rhetoric.

In H2 2022, we expect the AUDUSD to go higher to $0.74. The Bank of England could hike rates next month, despite a political crisis that threatens Prime Minister Boris Johnson's position on confidence that Britain's economy can withstand a wave of COVID 19 infections.

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 bought it at $1.3733 last time.

The Bank of Korea raised its benchmark interest rate by 25 basis points to 1.25% in Asia on Friday, and South Korean won saw a weekly rise of about 1.3%, the Bank of Korea said on Friday.