Dollar Up Over Fed Hints at Early Asset Tapering, Interest Rate Hikes

The dollar was up on Thursday morning in Asia, as hawkish comments from the U.S. Federal Reserve increased bets on earlier-than-expected asset tapering and boosted the dollar.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched up 0.02% to 92.297 by 12:33 AM ET (4:33 AM GMT).

The USD/JPY pair edged up 0.19% to 109.67, with the dollar pulling itself up from Wednesday’s low of 108.71.

The AUD/USD pair was up 0.21% to 0.7394 Australian trade data released earlier in the day said that exports rose 4% month-on-month in June, with imports growing 1% month-on-month and the trade balance at AUD10.496 billion. The NZD/USD pair inched up 0.10% to 0.7054.

The USD/CNY pair inched down 0.02% to 6.4639 while the GBP/USD pair inched up 0.05% to 1.3891.

Also giving the U.S. currency a boost was Fed Vice Chair Richard Clarida, who said on Wednesday that the conditions for an interest rate hike could be met in late 2022, with a move following in early 2023. Alongside three of his colleagues, Clarida also hinted that asset tapering could begin later in 2021 or early 2022.

However, this is dependent on progress in the labor market’s recovery from COVID-19, which will be gauged in Friday’s U.S. jobs report, including non-farm payrolls.

“It is reflective of a hawkish drift among the committee about the risks of more persistent inflation, and what that might mean for achieving the Fed’s new inflation framework… this is all to say that the stakes for Friday’s payrolls, and subsequent payrolls, are sky-high,” NatWest Markets analyst Brian Daingerfield told Reuters.

Making predictions on the jobs report difficult is the continuous spread of COVID-19 cases globally, the resultant labor bottlenecks, and Wednesday’s U.S. economic slowdown data.

The ADP nonfarm employment change was at 330,000 in July, lower than expected. The services Purchasing Managers’ Index (PMI) was 59.9, while the Institute of Supply Management (ISM) non-manufacturing employment was at 53.8 and the ISM non-manufacturing PMI was at 64.1.

Clarida’s comments led investors to price in slightly more chance of a hike between late 2022 and early 2022 and flattened the Treasury yield curve as short-term yields rose.

Should the Fed follow the timetable set by Clarida, it is set to begin asset tapering even earlier than the European Central Bank, which is still working to get inflation towards its target.

Meanwhile, the Bank of England is also moving closer towards asset tapering and could potentially reveal the timetable as it hands down its policy decision later in the day. The Reserve Bank of India will hand down its own policy decision on Friday.

However, the central bank that could beat everyone to the asset tapering post is the Reserve Bank of New Zealand, which is widely expected to hike rates at its next policy meeting on Aug. 18.