Dollar Rallies as Focus Returns to Fed After Uneventful Trump

  • Trump didn’t say anything negative so dollar supported: SocGen
  • Goldman raises odds of U.S. rate hike in March to 60% from 30%

Why Markets Should Be Ready for a Fed Rate Hike

The dollar and Treasury yields rebounded after a brief retreat as President Donald Trump’s speech offered scant details on economic policy, putting the focus back on the prospect of a U.S. rate hike as soon as March.

Traders see an over-50 percent chance of a U.S. interest-rate rise this month after New York Fed President William Dudley and his San Francisco counterpart, John Williams, signaled a greater willingness to tighten monetary policy. Trump delivered his first congressional address which revived campaign themes but fell short of expectations, especially details on fiscal stimulus.

“Positions were pretty much squared ahead of this event and Trump didn’t say anything negative, so the dollar for now is underpinned by expectations for the Fed’s rate hike this month,” said Kyosuke Suzuki, head of FX and money-market sales at Societe Generale in Tokyo. “Downside concerns for the dollar in general have subsided due to Fed expectations.”

Trump made no suggestions on how he would pay for his plans which included a replacement of Obamacare, a tax overhaul with cuts for the middle class, $1 trillion in infrastructure investment and an increase in defense spending. “When all is said and done it was high on rhetoric but again, very low on detail,” said Jeffrey Halley, senior market analyst at Oanda Corp. in Singapore.

The dollar fell briefly during Trump’s speech. Asia-based market-makers showed offered prices on their platforms after clients who saw nothing new in Trump’s prepared text, started to sell the greenback even before he ended his speech, according to a regional trader.

  • USD/JPY climbs 0.7% to 113.57 while 10-year Treasury yield adds 3bps to 2.42% after Trump’s speech ended; USD/JPY fluctuated between 112.76-113.57
    • Bloomberg Dollar Spot Index advanced 0.4% to a one-week high as the dollar rose against all its Group-of-10 peers
    • Trump’s emphasis on immigration during his speech suggests wage pressures will be reinforced and this should be bearish for bonds and bullish for dollar, says Vishnu Varathan, an economist with Mizuho Bank Ltd. in Singapore. “Yet the ‘fair trade’ stance could suggest that too much dollar strength will face criticism, so there’s a rather twitchy path for dollar bulls”
  • Treasuries were sold off earlier on Dudley’s comments that the case for Fed tightening had become “a lot more compelling,” says Rodrigo Catril, a currency strategist at National Australia Bank in Sydney, adding that this sent USD/JPY above 113
    • Goldman increased the odds of a U.S. rate hike at March policy meeting to 60% from 30%
  • AUD/NZD rises 0.6% to 1.0712 
    • Australia’s 4Q GDP rose 1.1% Q/Q vs est. 0.8% gain

— With assistance by Michael G Wilson, and Y-Sing Liau

    Before it's here, it's on the Bloomberg Terminal.