November 27, 2018 / 2:19 AM / 6 months ago

Dollar gains as Fed's Clarida backs further rate hikes

NEW YORK (Reuters) - The U.S. dollar hit two-week highs on Tuesday after Federal Reserve Vice Chair Richard Clarida backed further interest rate hikes, taking a less dovish stance than some investors had anticipated.

A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

Clarida noted the importance of monitoring economic data as the U.S. central bank approached a neutral stance and stressed how difficult it was for the Fed to determine both the neutral interest rate and the maximum level of unemployment.

“I think the market went into that looking for something a bit more dovish,” said Richard Franulovich, head of FX strategy at Westpac Banking Corp in New York.

“His first comments as vice chair a couple of weeks ago saw the dollar fall notably...he cast himself as sort of a cautious vice chair. Today was a bit more even-handed,” Franulovich said.

Clarida said on Nov. 16 that U.S. interest rates are nearing Fed estimates of a neutral rate, and being at neutral “makes sense.”

The dollar index against a basket of currencies rose .DXY as high as 97.497, the highest since Nov. 13.

A speech by Fed Chairman Jerome Powell on Wednesday and minutes from the Fed’s Nov. 7-8 meeting on Thursday will be evaluated for further indications of how many more times the U.S. central bank is likely to hike interest rates.

Powell said last month the Fed may raise interest rates above an estimated neutral setting as the “remarkably positive” U.S. economy continues to grow.

“The Powell speech on the overshoot of neutral was construed as a very hawkish delivery,” said Mark McCormick, North American head of FX strategy at TD Securities in Toronto. “The Fed has been gently walking that back since.”

Clarida’s comments on Tuesday are “reconfirming that the overshooting of the neutral is not a specific goal, but it’s something that they will probably do if the data allows them to do it,” McCormick said.

The greenback was also bolstered by concerns about trade tensions with China, after U.S. President Donald Trump said he expects to raise tariffs on $200 billion in Chinese imports to 25 percent from 10 percent currently.

Trump and Chinese President Xi Jinping are scheduled to meet and discuss contentious trade matters at the G20 summit to be held in Buenos Aires on Nov. 30 and Dec. 1.

Sterling was weaker after Trump said the agreement allowing Britain to leave the European Union may make trade between Washington and London more difficult.

Editing by Bernadette Baum and Chizu Nomiyama

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