US Dollar: Fed repricing supports stronger levels – MUFG

MUFG’s Lee Hardman highlights that the US Dollar has extended gains, pushing the Dollar Index to a fresh year-to-date high as markets price a faster pace of Federal Reserve rate hikes. Futures now fully discount a 25bps move in December and additional tightening into January, with upcoming Fed speakers seen as key for confirming the likelihood of back-to-back hikes.

Dollar index climbs on Fed repricing

"The US dollar has continued to strengthen overnight resulting in the dollar index hitting a fresh year-to-date high of 103.08. The US dollar’s renewed upward momentum has been encouraged by expectations that the Fed is likely to speed up the pace of rate hikes in response to the recent run of stronger US inflation data."

"There are currently around 28bps of hikes priced by December, and 43bps of hikes priced by the following meeting in January indicating that even if the Fed hikes by 25bps in December it is now expected to quickly follow up with another 25bps hike at the start of next year."

"The updated views of New York Fed President John Williams could carry more weight. He stated earlier this month that it is an “appropriate time to accumulate more information to help us determine what the appropriate stance of policy is to make sure we achieve a timely return to our 2% target”. While we don’t expect a larger 50bps hike to be delivered in December, it is more likely now that the Fed could hike rates back-to-back in December and January."