The dollar index pulled further away from 20 year highs on Wednesday, having already priced the US Federal ReserveFederal Reserve to raise interest rates by a half point and by some 250 basis points bps by the end of the day.
Money markets are betting that the Fed will raise rates as high as 3.6 per cent by the end of 2023 to tame inflation at 40 year highs.
The Fed has kicked off its hiking cycle in March and it is seen as delivering a 50 bps move on Wednesday, with two more half-point hikes priced for the next two meetings.
It may announce when it will start reducing its $9 trillion balance sheet.
The dollar index was lifted 5 per cent last month to around 103.93, according to those bets. It has fallen 0.3 per cent off those levels and by 10.30 am GMT 6.30 pm, Singapore time was at 103.40, slightly lower on the day.
A major correction in the dollar would happen only if the Fed pushes back against hawkish market pricing and until that happens, there is a degree of freedom for markets to reprice the terminal rate to 4 per cent, according to Francesco Pesole, ING Bank strategist.
Where do you place your money if you let go of dollar positions? Pesole asked about the economic slowdown in China and the Russia-Ukraine war in Europe.
The euro was at two-decade lows last week around US $1.0469 despite the dollar strength weighing on other currencies. It was at US $1.0525 on Wednesday.
Gergely Majoros, a member of Carmignac's investment committee, said the fundamentals, the interest rate difference, the growth outlook, and the risk-off mood tend to favor the dollar.
We have increased dollar positioning because of a number of factors that point to a stronger dollar and a weaker euro in our global portfolio. Some markets' expectations for future US inflation - so-called break-evens derived from Treasury inflation-protected securities TIPS have decreased with five-year break-evens around 3.2 per cent compared to April highs of 3.6 per cent.
If the Fed gives an indication that they will aggressively frontload the tightening cycle and the back end of the Treasury curve comes off a bit, that will be a sign that markets are starting to price the Fed ahead of the curve on inflation, he added.
The Australian dollar rose 0.4 per cent as a result of Tuesday's bigger than expected interest rate hike.