NEW YORK (Reuters) - The dollar hit a three-week peak on Tuesday after Federal Reserve Chairman Jerome Powell’s remarks before U.S. lawmakers suggested a willingness to adopt a more hawkish stance if needed to prevent the economy from overheating, even as he said the central bank would stick with gradual interest rate increases.
Powell, in his first public appearance since being sworn in as chairman earlier this month, pledged to “strike a balance” between the risk of an overheating economy and the need to keep growth on track.
In response to a question after presenting his congressional testimony, Powell said that if the Fed got behind and the economy overheated, the central bank would have to raise rates faster.
The dollar index .DXY, which measures the greenback against a basket of six other major currencies, has climbed 2.5 percent since hitting a three-year low more than a week ago. It was last up 0.6 percent at 90.356, after earlier reaching a three-week peak of 90.498.
“We felt that the testimony provides insight into a Fed that may pivot to a more hawkish platform, particularly if it continues to see encouraging data points,” said Marvin Loh, senior global market strategist at BNY Mellon in Boston.
“The markets, which had been mostly unchanged prior to the question-and-answer session, have since taken this hawkish tone to heart,” he added.
Some of the headwinds the U.S. economy faced in previous years have turned into tailwinds, Powell said, noting recent fiscal policy shifts and the global economic recovery.
The Fed is expected to approve its first rate increase of 2018 at its next policy meeting in March, when it will also provide fresh economic projections and Powell will hold his first news conference. Fed policymakers still anticipate three rate increases this year.
BNY’s Loh said he did not think Powell intended to present a hawkish view, but that the Fed chairman gave investors a peek into a new U.S. central bank that could be the least dovish in two decades.
In late trading, the dollar was up 0.44percent against the Japanese yen JPY= at 107.36 yen.
The euro EUR=, meanwhile, fell to a three-week low against the dollar and last traded down 0.7 percent at $1.2231.
The euro zone currency could be subject to potential swings in price, analysts said, as Italians prepare to vote in a national election on Sunday, and the leading political parties in Germany decide on a coalition deal that could secure Angela Merkel a fourth term as chancellor.
James Chen, head of research at Forex.com in Bedminster, New Jersey, said a breakdown in the euro below $1.2200 would be a key technical event, which should target the next support level of $1.2075.
Reporting by Saqib Iqbal Ahmed and Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis and Leslie Adler