By Peter Nurse
Investing.com - The U.S. dollar pushed higher in early European trade Thursday, boosted by rising Treasury yields after the minutes from the December Federal Reserve meeting raised expectations of an early interest rate hike and also put the issue of reversing the bank's bond purchases in play.
At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 96.392, remaining close to Tuesday’s one-week high.
“The minutes revealed that committee members felt inflation risks were more persistent and to the upside, and there was general agreement that the taper should be accelerated with three tentative rate hikes penciled in,” said Jeffrey Halley, an analyst at OANDA, in a note.
While this was largely what was said by Chairman Jerome Powell after the meeting in December, five-year U.S. Treasury yields, which are keenly sensitive to interest rate expectations, climbed to their highest in nearly two years. That was also due to the minutes showing that some policymakers were pressing for the Fed to start selling back into the market some of the bonds it has bought over the last two years.
Additionally, Fed Funds futures have priced in a roughly 80% chance of a quarter-percentage-point Fed hike by its March meeting.
USD/JPY fell 0.2% to 115.93, remaining near a five-year high of 116.35, while EUR/USD fell 0.2% to 1.1290. GBP/USD dropped 0.3% to 1.3518, while the risk-sensitive AUD/USD slumped 0.8% to 0.7160.
The Fed minutes mentioned an extremely tight labor market as a point of concern, and ADP data released Wednesday showed an increase in private payrolls of over 800,000 in December, more than double the expected number.
Weekly jobless claims data are due later Thursday, ahead of Friday’s key nonfarm payrolls report.
“We suspect March is too early for a rate hike given the lack of visibility caused by Omicron, but May is clearly on the cards,” said analysts at ING, in a note.
Elsewhere, USD/CNY rose 0.3% to 6.3749, despite China’s services sector growing more quickly in December, with the Caixin services purchasing managers’ index rising to 53.1 from 52.1 in November.
USD/TRY rose 0.8% to 13.7879, with Turkey set to release its latest data for foreign exchange reserves later in the session. The country’s central bank recently unveiled a plan to compensate lira holders for any currency losses, in order to stop sharp selling of its currency as it cut interest rates. However, it has also been intervening heavily in the foreign exchange markets as well.
“By my reckoning, the lira has already given back around 35% of its engineered gains in the past week or so, if reserves show a big drop this evening, the Turkish lira vigilantes will be back out in force,” added Halley.