Dollar hovers near three-month high, Aussie rises on rate hike prospects

The US dollar remained steady near a three-month peak amid growing expectations that the Federal Reserve will take a measured approach to interest rate cuts this year. In contrast, the Australian dollar saw gains after the Reserve Bank of Australia (RBA) hinted at the possibility of another rate hike to combat inflation.

Following its February meeting, the RBA opted to maintain rates at 4.35 per cent, in line with expectations. However, the central bank's cautionary remarks regarding the potential need for further rate hikes nudged investors to postpone expectations of the first rate cut to August, rather than June. Economists polled by Reuters also anticipate the RBA to hold rates steady well into the latter half of the year.

In response, the Australian dollar climbed by 0.44 per cent to $0.65115 post the RBA's decision, rebounding from a recent 2-1/2 month low. Similarly, the New Zealand dollar rose by 0.23 per cent to $0.6069.

Charu Chanana, Head of Currency Strategy at Saxo in Singapore, said, "It totally makes sense for the RBA to retain hawkish bias, given the pushback to easing expectations we have seen lately from the Fed, ECB and other major central banks."

While the US dollar index slightly eased to 104.32 from Monday's peak of 104.60, it remains up by 3 per cent for the year after experiencing a 2 per cent decline in 2023. Strong US economic data, including an uptick in the services sector growth in January and a robust jobs report last week, have dampened hopes for imminent interest rate cuts by the Fed.

As traders adjust their rate cut expectations, only a 16 per cent chance of a cut in March is currently priced in, down from 69 per cent at the beginning of the year. Moreover, they are now anticipating 115 basis points of cuts this year, compared to around 150 basis points expected in early January.

Elsewhere in currencies, the euro remained stable at $1.0750, while the pound edged up by 0.11 per cent to $1.25495, despite hitting a seven-week low on Monday. Despite upbeat economic data showing a lower unemployment rate than previously estimated, expectations for British rate cuts remain subdued.

The Japanese yen saw some strength, trading at 148.44 per dollar, albeit not far from a two-month low touched on Monday. Japan's real wages fell for the 21st consecutive month, while household spending declined for the 10th straight month, reflecting the ongoing challenges of inflation outpacing wage growth and its impact on consumer spending.

(With Reuters inputs)