LONDON, Nov 23, Reuters -- The dollar index held near 16 month highs on Tuesday after Federal Reserve Chair Jerome Powell was picked for a second term, reinforcing market expectations that interest rates will rise in the U.S. in 2022.
In recent months, currency markets have been driven by market perceptions of the different paces at which central banks reduce pandemic-era stimulus and raise rates.
Markets are taking every USD strength story they can get in this environment, which is seen in the moves after Powell's widely expected reappointment, said Ima Sammani, FX market analyst at Monex Europe.
Sammani said the dollar's strength was due to rising front-end U.S. yields, which was likely caused by commentary from Federal Reserve policymakers. They include Atlanta Federal Reserve President Raphael Bostic, who said on Monday that speeding up the tapering of asset purchases could give the Fed more room for rate hikes in 2022.
Commerzbank's head of FX and commodity research, Ulrich Leuchtmann, said the decision to retain Powell was beneficial for the dollar because President Joe Biden respects the Federal Reserve's independence from government.
Biden has shown he is a principled person with Monday's nomination, he wrote in a note to clients.
The dollar index was at 96.489 at 1135 GMT on Tuesday, slightly less changed on the day and slightly below the 16 month high of 96.603 reached during Asian trading hours.
The dollar was at its highest level against Japan's yen in four and a half years, as investors expected U.S. interest rates to differ from those in Japan.
Two-year U.S. Treasury yields rose 8.5 basis points on Monday to their highest since early March 2020, and the Japanese currency is sensitive to moves in U.S. Treasury notes.
The dollar-yen move had dwindled by 1135 GMT, with the pair flat at 114.865, compared to the peak of 115.160 reached earlier in the session.
The euro was up 0.1% against the dollar at $1.12455, recovering slightly after hitting a 16 month low against the dollar.
The euro went up slightly on the day after getting better than expected euro zone PMI data.
The euro has lost 2.7% this month, hurt by a combination of the European Central Bank's dovish monetary policy stance and a resurgence of COVID 19 cases in Europe.
The World Health Organization warned earlier this month that current transmission rates in 53 European countries are of grave concern and Germany's health minister has called for further restrictions on public spaces.
Turkey's lira fell to a new record low of 12 against the dollar. This was its eleventh record low in as many days after President Tayyip Erdogan defended recent rate cuts and promised to win an economic war of independence. The Australian dollar was down 0.1% at $0.7218, while the New Zealand dollar was down 0.5% at $0.6923.
The Reserve Bank of New Zealand RBNZ is projected to deliver a 25 basis point rate hike on Wednesday, but speculation is rife that the central bank could go for a 50 basis point increase to counter rising inflationary pressures.
The repricing in the curve, based on the RBNZ forward guidance that is delivered tomorrow, is likely to be less aggressive than what is currently being priced in the U.S. Treasury curve in the run-up to December's Fed meeting, according to Sammani, Monex Europe's Sammani.
This dynamic is priced into NZD today. The price of cryptocurrencies was around $56,300. Earlier this month, it had hit a new all-time high of $69,000.