Dollar pauses for breath as Fed officials leave market pondering over rates path

The dollar hovered below a near two-decade high in Asian trading on Friday, having slipped overnight after two Federal Reserve policymakers said they favored a smaller rate rise than the 100 basis-points that investors were betting on.

The dollar index, which measures the currency versus six counterparts, edged 0.07% higher to 108.65, after reaching and then falling back from the highest since September 2002 at 109.29 on Thursday.

Traders had ramped up bets that the Fed would go for a super-sized tightening at their July 26-27 meeting after data on Wednesday showed consumer price inflation racing at the fastest pace in four decades.

But those bets were pared after Fed Governor Christopher Waller and St. Louis Fed President James Bullard both said they favored another 75 basis-point hike for this month, in spite of the inflation figures.

Fed funds futures currently indicate a 31% chance of a 100 basis-point increase, down from around 70% before the comments.

Even with the pullback, the dollar index is on track for a third winning week, up 1.58% from last Friday on both bets for an increasingly aggressive Fed and as worries about a resulting recession fueled demand for the currency as a safe haven.

“Momentum remains with the U.S. dollar,” said Sean Callow, a currency strategist at Westpac, predicting scope for the dollar index to top 111 in coming weeks.

“The FOMC will have to remain hawkish both at the July meeting and beyond, solidifying U.S. dollar yield support.”

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