Dollar gains on euro with Fed's Waller hawkish on rates

Fed Governor Christopher Waller said late on Wednesday that recent disappointing data affirms the case for the U.S. central holding off on cutting its short-term interest rate target.

"Waller is one of the more important Fed policy makers and, while I don't see this being a big move, the remarks have some momentum into the market which has been stuck in very tight trading ranges," Lee Hardman, senior currency strategist at MUFG, said.

Market expectations for the first rate cut to occur at the Fed's June meeting have eased as traders prepared for the possibility that the U.S. central bank could hold rates higher for longer. Current pricing has it at a 64% chance, compared with 70% around this time last week, according to the CME Group's FedWatch tool.

But stickier-than-expected inflation in January and February is unlikely to be replicated in March, Helen Given, FX trader at Monex USA, said. The Fed is unlikely to change its rate cut projections, she added.

"Today's movement is a little bit outsized and I think its really to do with the fact that there's just slim flows across the world," Given said.

This week's main economic focus is Personal Consumption Expenditures (PCE) data due on Friday. Fed Chair Jerome Powell is also due to speak on Friday.

Data on Thursday showed that the U.S. economy grew faster than previously estimated in the fourth quarter, lifted by strong consumer spending and business investment in nonresidential structures such as factories.

The euro reached $1.0775, its lowest in five weeks, and was last down 0.16% at $1.0809. The pound strengthened 0.05% to $1.264.

The dollar fell 0.05% to 104.37, after earlier touching 104.73, its highest since mid-February.

Analysts expect managers to sell the greenback for month- and quarter-end rebalancing.

INTERVENTION WATCH

Should the inflation data on Friday surprise on the upside and support the dollar, its most dramatic impact could be on the yen. Market participants say there is a dense thicket of options restricting moves in dollar/yen around the 152 level, and so a breakthrough could trigger more significant moves.

"Once dollar/yen touches 152, I think there will probably be a sharp move upward, and that's when intervention could take place," Takeshi Ishida, a currency strategist at Resona Holdings, said.

Light trading volumes, with U.S. Treasuries and stocks closed for the Good Friday holiday, could add to any volatility.

Japanese authorities held a meeting on Wednesday on the currency's weakness and ramped up their verbal warnings, putting the market on the lookout for any signs that words are being backed up with action.

Japanese Prime Minister Fumio Kishida also said on Thursday the government will not rule out any options in addressing excessive moves in the currency market, stressing Tokyo's resolve to step into the market if it sees the yen's fall as overdone.

"Each time that currency officials in Japan have talked about this, it's had less and less of an impact on yen pricing," Given said. "Because of that we are now looking at a real tangible intervention risk."

Japan intervened in the currency market three times in 2022, selling the dollar to buy yen, first in September and again in October as the yen slid towards a 32-year low of 152 to the dollar.

A summary of opinions at the Bank of Japan's March meeting released last Thursday gave the currency little support, showing many policymakers saw the need to go slow in phasing out ultra-loose .

Meanwhile, China's central bank set the yuan fixing at the widest gap against Reuters' estimate in nearly five months, as authorities step up efforts to prevent sharp declines in the currency. The yuan slumped to a four-month low last Friday. CNY/

The onshore yuan was mostly flat at 7.2278 per dollar, while offshore it was at 7.2590 per dollar, a touch weaker.

The Australian dollar fell as low as $0.6486, the weakest since March 5. As well as being hurt by Waller's remarks, data from Australia showed retail sales came in below economists' expectations in February. AUD/

In cryptocurrencies, bitcoin gained 2.93% to$70,888.00.

Source: Forex-Markets-Economic Times