Dollar rises to one-month highs

The near two-week old unwinding of dollar-funded carry trades continued on Wednesday, as hawkish comments from the Federal Reserve and rising US inflation pointed to further US rate hikes ahead.
The move spilled over into other major currencies, with the dollar rising to one-month highs against the euro, yen, sterling, Swiss franc and Australian dollar. The dollar rally was aided by the newsflow from Europe, with German business sentiment disappointing and the Bank of England releasing soft minutes. But there was no doubt the rally was made in the US.
Dollar-buying was set in train by the Federal Reserve, which on Tuesday warned that inflationary pressures were building and output growth was “solid”. A raft of analysts warned that the risk to their end-of-year interest rate forecasts, generally in the range of 3.75-4 per cent, was now to the upside.
These sentiments received a further shot in the arm when headline consumer price inflation came in at 0.4 per cent month-on-month in February, with the core rate at 0.3 per cent, both ahead of forecast.
The dollar rally has been most pronounced against high-yielding emerging market currencies, as rising US Treasury yields erode the attractiveness of dollar-funded carry trades, leading to an unwinding of these positions. But on Wednesday the dollar made serious headway against other major currencies.
The dollar broke through the $1.30 barrier against the euro for the first time in five weeks, pushing to $1.2973, a gain of 1.7 per cent since the Fed statement. The greenback also strengthened 0.9 per cent to Y105.94 against the yen, 1.7 per cent to $1.8686 versus sterling, 1.8 per cent to SFr1.1980 against the Swiss franc and 2.6 per cent to $0.7703 against the Australian dollar.
The New Zealand dollar plunged 3.6 per cent to $0.7159 as New Zealand’s current account deficit widened to NZ$3.1bn in the fourth quarter, against expectations for NZ$2.4bn. The deficit equalled 6.4 per cent of GDP in 2004 as a whole.
Sterling slipped to £0.6944 against the euro and Y197.96 against the yen on Wednesday on the back of the minutes of the Bank of England’s last policy meeting.
Despite the Bank’s monetary policy committee voting by a reduced majority of 7-2 against an immediate rate hike, the consensus was that the minutes were broadly dovish.

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