LONDON, Jan 6, Reuters - The US dollar gained a breather in its climb towards a 14 month high on Thursday after it benefited from the Federal Reserve's December policy meeting, which boosted expectations of a U.S. rate hike as early as March.
The meeting minutes showed that officials had discussed shrinking the Fed's asset holdings as well as raising interest rates sooner than expected to fight inflation.
Money markets are now estimating an 80% probability of a U.S. interest rate rise by March and more than 80 basis points of cumulative rate increases in 2022, a huge shift in expectations as only three months ago investors were not expecting the first U.S. rate hike until the summer of 2023.
Elsa Lignos, head of FX strategy at RBC Capital Markets, said that although rate hike expectations for 2022 have propped up the dollar, there is the possibility of more rate hikes for 2023 that could provide further strength to the currency.
The consensus narrative seems to be that the Fed will overtighten in 2022 and be forced into slowing down materially in 2023, she wrote in a note.
We think it is a repricing higher for 2023, which has the potential to boost USD this year and we are watching this as a key driver for the dollar, she added.
The dollar index which measures the dollar against major peers was unchanged at 96.17 on the day after creeping closer to a 14 month high of 96.93 at 1220 GMT.
The dollar made a lot of gains against some rivals like the Australian dollar, which lost more than 1% at one point.
The Aussie recouped some losses, stabilising down 0.70% at $0.717. The yen also reduced its losses from a high of 116.18 per dollar to 115.84, down 0.23%.
The pound dropped 0.13% at $1.3538, after the Fed minutes it dropped to its lowest level in nearly two months, at $1.3599.
The euro was broadly unchanged, slightly above the $1.13 mark, as it continued to consolidate in the middle of the trading range in which it has been since mid-November.
After falling more than 5% overnight, Bitcoins fell below the $43,000 level, which was among the hardest hit in the overnight market selloff.