Dollar finds a footing as traders brace for hawkish Fed

© Reuters. FILE PHOTO: A picture illustration of U.S. dollar, Swiss Franc, British pound and Euro bank notes, taken in Warsaw January 26, 2011. REUTERS/Kacper Pempel/File Photo

By Tom Westbrook

SYDNEY (Reuters) - The dollar clung to a late week bounce on Monday as investors braced for January's U.S. Federal Reserve meeting and raised bets it will chart a year ahead holding several rate hikes, while China surprised analysts with a benchmark cut.

Chinese economic growth data, due later on Monday (0200 GMT), a Bank of Japan policy meeting which concludes on Tuesday, British inflation data on Wednesday and Australian jobs figures on Thursday are also in view as traders gauge the global policy outlook.

The dollar was 0.2% higher at 114.45 yen early in the Asia session, about 0.8% above a Friday low. It also edged about 0.1% firmer on the euro to $1.1403.

The moves follow the dollar's jump on Friday along with U.S. yields and underscore support for the greenback from the hawkish rates outlook, even if momentum for gains has started to wane.

The U.S. dollar index, which declined sharply last week until Friday's leap, sat at 95.225 in Asia on Monday.

"Friday's move suggest to me that the interest rate driver for dollar strength is not dead and buried," said National Australia Bank (OTC:NABZY)'s head of foreign exchange strategy Ray Attrill.

He said it may not necessarily return to drive new dollar highs, but added: "We've had a hawkish twist out of every Fed meeting since June last year."

The Fed meets Jan. 25-26 and is not expected to move rates, but there is a growing drumbeat of hawkish comments coming from within and outside the central bank.

Last week, J.P. Morgan CEO Jamie Dimon remarked that there could be "six or seven" hikes this year and billionaire hedge fund manager Bill Ackman floated on Twitter (NYSE:TWTR) over the weekend the possibility of an initial 50 basis point hike to tame inflation.

The cash Treasury market was closed for a holiday on Monday but 10-year futures were sold to a two-year low and Fed funds futures also fell, reflecting a strengthening conviction in the market of at least four hikes in 2022.

The Australian and New Zealand dollars, which dropped sharply on Friday, remained under pressure on Monday. The Aussie was last down 0.2% at $0.7200, ending for now a brief foray above resistance around $0.7276. [AUD/]

The kiwi edged 0.2% lower to $0.6791.

In China, bonds rallied and the yuan slipped after the central bank cut borrowing costs for medium-term loans for the first time since April 2020, defying market expectations.

Ten-year government bond futures rose to their highest since June 2020 after the move and the yuan began onshore trade marginally softer at 6.3555 per dollar.

Chinese gross domestic product figures due at 0200 GMT are expected to show annual growth at its slowest in 18 months as a property downturn drags on demand.

Elsewhere a month-long rally for sterling has petered out around its 200-day moving average. It held at $1.3669 on Monday, but analysts say it could resume gains if inflation data makes the case for higher interest rates.

"Interest rate markets are currently pricing an 80% + chance of a 25 bp rate hike by the Bank of England on 3 February," said Commonwealth Bank of Australia (OTC:CMWAY) strategist Joe Capurso.

"A quicker pace of inflation could see pricing move closer to 100%."

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Currency bid prices at 0139 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar

$1.1402 $1.1417 -0.13% +0.29% +1.1425 +1.1401

Dollar/Yen

114.4500 114.2250 +0.20% -0.50% +114.5050 +114.2800

Euro/Yen

130.51 130.36 +0.12% +0.15% +130.5500 +130.3200

Dollar/Swiss

0.9156 0.9140 +0.17% +0.37% +0.9158 +0.9143

Sterling/Dollar

1.3665 1.3685 -0.14% +1.05% +1.3675 +1.3665

Dollar/Canadian

1.2549 1.2557 -0.06% -0.74% +1.2555 +1.2539

Aussie/Dollar

0.7200 0.7218 -0.24% -0.95% +0.7224 +0.7199

NZ

Dollar/Dollar 0.6790 0.6810 -0.28% -0.78% +0.6820 +0.6791

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ