Hawkish Tone by Federal Reserve Sends Dollar Sharply Higher

Strategic Insights -

The Federal Reserve's more hawkish tone on inflation prompted a sharp rise in the dollar, despite expectations of a quarter-point rate hike to 2.75 percent. The central bank's statement added a new phrase, "appropriate monetary policy," which market watchers took as a signal for potential more aggressive rate rises. This increase in hawkishness pushed the dollar up against the euro, yen, and other major currencies, while pushing yields on 10-year Treasury notes to an eight-month peak.

Key Takeaways:

  • The Federal Reserve raised short-term rates by a quarter-point to 2.75 percent, as expected.
  • The central bank's statement added a new phrase, "appropriate monetary policy," which market watchers took as a signal for potential more aggressive rate rises.
  • The dollar rose sharply against the euro, yen, and other major currencies, with the euro falling to $1.309 and the yen falling to Y105.55.
  • Ten-year Treasury yields jumped 8 basis points to 4.61 percent, a new eight-month peak.
  • Market analysts see a risk of a higher Fed funds rate before year-end, with some predicting rates could hit 4.25 percent by year-end and reach 5 percent in the first half of 2006.
  • Sterling was soft as UK consumer inflation remained muted in February, with the annual inflation rate of 1.6 percent marginally below consensus forecasts.

Statistics:

  • The dollar rose 10 basis points against the euro, from $1.319 to $1.309.
  • The dollar rose 45 basis points against the yen, from Y105.1 to Y105.55.
  • Ten-year Treasury yields jumped 8 basis points to 4.61 percent.
  • The annual core rate of US producer price inflation rose to 2.8 percent, its highest level for 9 years.
  • Consumer price inflation in the US is due today and markets will be looking for any signs of a pick-up to test the Fed's newly stated concerns.

Sources:

  • "Dollar jumps as Fed raises rates," The Financial Times, London.
  • "US inflation accelerates, Fed seen reacting," Reuters, New York.
  • "Sterling weak as UK inflation stays low," BBC News, London.
  • "Calyon advises short sterling/yen position," Calyon, London.