Dollar near 18-month high ahead of bumper central bank week

The euro was at $1.1148, just off last Friday‘s low of $1.1119, its weakest since June 2020. The Aussie dollar was at $0.6991, also languishing near Friday’s 18-month low, while sterling was at $1.34015, near the one-month low hit last week.

The greenback had its best week in seven months last week supported by investors seeking safety amid a sell-off in riskier assets and by analysts raising forecasts for U.S. interest rate hikes.

MSCIs 50-country main world index is headed for its worst month since the start of the pandemic. [MKTS/GLOB]

Market pricing now suggests a more than 90% chance of at least four rate hikes by the end of the year and a 67% chance of at least five.

“The USD ‘smiled’ again, drawing on a combination of rates repricing and much weaker risk sentiment,” said analysts at Barclays.

Looking forward, they said weak and volatile equities could support the dollar but the potential for further dollar gains based on rate hike expectations was limited, as last weeks moves mean an “aggressive normalisation cycle” is now priced in.

The dollar index, which measures the greenback against six major peers was at 97.205, just below Fridays 18-month top of 97.441.

The yen was at 115.23 per dollar, in the middle of its recent range, buffeted by the headwind of rising U.S. rates with little prospect of rate hikes at home, but supported by some demand for it as a safe-haven.

While U.S. payroll figures are out on Friday, the focus this week shifts a little away from the Fed to other central banks.

Australia-watchers await the central bank‘s Tuesday meeting, amid rising expectations for an announcement for the end of its quantitative easing programme. That will be followed by a as speech by the RBA’s governor on Wednesday and a statement on monetary policy Friday.

The week “will go far to define the psychology of the market for the next few months,” said Westpac analysts. “That QE will cease will not be a surprise, so the real focus is on the RBAs shifting economic view and its implications for the (benchmark) cash rate.”

The Bank of England also has a meeting on Thursday, with a Reuters poll of economists predicting a second rate hike in less than two months, as the BOE reverses more pandemic stimulus, after inflation jumped to its highest in nearly 30 years.

The European Central Bank also has a policy meeting Thursday. While no policy change is expected, analysts are starting to warn that approaching rate hikes from the Fed will shrink the ECBs window for action.

In cryptocurrencies, bitcoin was at $37,700, after a quiet weekend for the digital asset.