Dollar pauses in bullish run; Aussie climbs on RBA’s hawkish outlook

(C) Reuters. FILE PHOTO: A U.S. five dollar note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration/File Photo

By Rae Wee

SINGAPORE (Reuters) – The dollar eased on Tuesday from its rally at the start of the week, but hovered near a one-month peak as traders raised their forecasts of U.S. Federal Reserve interest rate levels needed to tame inflation.

The Australian dollar, meanwhile, surged in the aftermath of the Reserve Bank of Australia’s (RBA) interest rate decision, rising as much as 1% to an intra-day high of $0.6952.

The RBA on Tuesday raised its cash rate by an expected 25 basis points, and signalled further rate hikes ahead.

Wrapping up its February policy meeting, the RBA said core inflation had been higher than expected and higher rates would be needed to ensure that inflation returns to its target of 2%-3%.

Elsewhere, markets were recovering from the shock of Friday’s jobs report in the United States, which showed that non-farm payrolls surged by an eye-watering 517,000 in January, pointing to a stubbornly resilient labour market.

The report, which wrongfooted traders banking on an imminent pause in the Fed’s rate-hiking cycle, gave the U.S. currency a leg up in previous sessions, though it gave back some of those gains in Asia trade on Tuesday.

Sterling was last 0.27% higher at $1.2054, after tumbling to a one-month low of $1.2006 in the previous session.

Similarly, the kiwi rose 0.29% to $0.6323, but was not far from Monday’s one-month trough of $0.6271.

The euro gained 0.12% to $1.0739, having slid to $1.0709 in the previous session, the lowest since Jan. 9.

“Since last Friday, (when) the U.S. reported a stronger than expected jobs number, this has reversed expectations that the Fed would pivot in its monetary policy,” said Tina Teng, market analyst at CMC Markets.

“I don’t think the jobs number is key … but it’s definitely a major impact on (the Fed’s) monetary policy.”

U.S. Treasury yields have risen on the back of higher rate expectations, with two-year yields touching a one-month high of 4.4930% on Monday. Two-year yields last stood at 4.4243%.

The benchmark 10-year yields were last at 3.6193%, having similarly climbed to a four-week peak of 3.6550% in the previous session.

Futures pricing show that markets are expecting the Fed funds rate to peak just above 5.1% by June, compared with expectations of less than 5% prior to Friday’s jobs report.

The surging U.S. currency pushed the U.S. dollar index to a near one-month high of 103.76 on Monday, and it was last 0.15% lower at 103.45.

Elsewhere in Asia, the Japanese yen rose 0.3% to 132.24 per dollar, but remained pinned near Monday’s one-month low of 132.90 per dollar.

Data on Tuesday showed that Japan’s real wages rose in December for the first time in nine months, though uncertainty remains over whether pay hikes will continue to sustain the country’s economic recovery.

A newspaper report on Monday said that Japan’s government has sounded out Bank of Japan (BOJ) Deputy Governor Masayoshi Amamiya to succeed incumbent Haruhiko Kuroda as central bank governor. Amamiya is considered by markets as more dovish than other contenders.

“I don’t think the BOJ will reverse monetary policy,” said CMC’s Teng, on market hopes the central bank will abandon its yield curve control policy once a new governor takes office.

“There are still economic concerns, there are still recessionary risks.”