Dollar Surges on Aggressive Fed Expectations; Euro Slips

By Peter Nurse – The U.S. dollar strengthened Wednesday on raised expectations of aggressive monetary policy tightening by the Federal Reserve, while the euro was weighed by the prospect of additional sanctions on Russia.

At 3 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 99.640, just off its highest level since May 2020.

Driving the stronger tone in the dollar were comments from Federal Reserve Governor Lael Brainard, who is awaiting confirmation as Vice Chair of the U.S. central bank, who called for interest rate increases and rapid reductions to the Fed’s balance sheet to bring U.S. monetary policy to a “more neutral position” later this year.

“I think we can all absolutely agree inflation is too high and bringing inflation down is of paramount importance,” Brainard said at a conference at the Minneapolis Fed.

Brainard is normally seen as a more dovish policymaker, and her comments resulted in U.S. bond yields climbing sharply, with the benchmark 10-year yield rising to its highest since March 2019.

The Fed raised interest rates by 25 basis points last month, its first increase since 2018, and expectations have been building that the central bank will move more aggressively at its meeting in May.

The minutes from the Fed meeting last month are due for release later Wednesday, and traders will parse their words carefully for guidance on what the policymakers plan to do next.

Elsewhere, EUR/USD dropped 0.2% to 1.0884, falling to its lowest level in nearly a month, with the U.S., European Union, and Group of Seven coordinating on a fresh round of sanctions on Russia, including a U.S. bar on investment in the country and an EU ban on coal imports.

“The euro’s performance is very strictly tied to the content of new sanctions the EU looks likely to impose on Russia; the bigger the implications for the energy market, the larger the impact on the euro,” said analysts at ING, in a note.

USD/JPY rose 0.3% to 123.91, heading back towards March’s near seven-year peak of 125.10, with the widening gap between U.S. and Japanese yields weighing on the yen.

GBP/USD fell 0.1% to 1.3062, while AUD/USD held firm at 0.7580, retaining Tuesday’s strength after the Reserve Bank of Australia signaled higher interest rates were approaching.

USD/PLN rose 0.2% to 4.2671 and EUR/PLN gained 0.1% to 4.6467 ahead of the latest meeting of Poland’s central bank later Wednesday, which is expected to result in an interest rate hike for the seventh straight occasion to counter surging inflation.