Fed rate hike bets underpin dollar after Powell testimony; yen edges higher

© Reuters. FILE PHOTO:Bundles of banknotes of U.S. Dollar are pictured at a currency exchange shop

By Masayuki Kitano

SINGAPORE (Reuters) – The dollar stood near a three-week high against a basket of currencies on Wednesday, after Federal Reserve Chairman Jerome Powell’s upbeat views on the economy bolstered bets on further Fed interest rate hikes this year.

Testifying before the U.S. House of Representatives’ Financial Services Committee, Powell acknowledged the economy had strengthened recently, a remark that prompted investors to increase bets on four rate increases in 2018.

The Fed’s last round of economic projections in December pointed to three rate increases this year.

The , which measures the greenback against a basket of six major currencies, held steady 90.372 (), after hitting a high near 90.50 on Tuesday, its strongest level in almost three weeks.

“Personally, I wonder whether his (Powell’s) comments were all that bullish on the economy, but that seems to be the market’s interpretation,” said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

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.

Against the yen, the dollar fell 0.2 percent on the day to 107.14 yen after the Bank of Japan on Wednesday trimmed the amount of super-long Japanese government bonds (JGBs) it offered to buy at its regular debt buying operation.

BOJ officials have said that any changes to bond-buying operations are fine-tuning and not meant as hints on its future policy.

The currency market, however, has been sensitive to tweaks to the BOJ’s bond-buying operations, after a reduction in the central bank’s buying of long-dated JGBs in January sparked speculation that the BOJ was moving toward an eventual exit from its large stimulus.

Analysts said the dollar could face headwinds against the yen over the next few weeks due to the potential for dollar-selling by Japanese players ahead of Japan’s financial year-end in March.

“Once we get past the middle of March and (flows from) exporters and repatriation abate, the dollar will probably gradually show firmness against the yen,” said Sumitomo Mitsui Banking Corporation’s Okagawa.

The euro held steady at $1.2230 (), after briefly slipping to $1.2221 its lowest since Feb. 9. The common currency has lost momentum since hitting a three-year high of $1.2556 on Feb. 16.

The euro 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.

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