Dollar up, Treasuries climb as Fed rates sentiment eases

The dollar hit a one-month high as Treasury yields climbed on growing speculation that the Federal Reserve may be reticent about cutting interest rates as early as March.

“We see the rebound in the dollar as a reflection of rates markets reducing their rate-cut expectations,” said Kristoffer Kjaer Lomholt, head of FX research at Danske Bank in Copenhagen. “The US economy looks to be on a stronger footing than most peers, which is also contributing to the investment case of being long US assets.” A possible pivot to rate cuts by the Fed has been the center of market attention after inflation slowed from its peak in mid-2022. This has ramped up bets for aggressive Fed easing this year, although a growing number of market participants believe this move may have been overdone. 

Investors are awaiting a speech by Fed Governor Christopher Waller scheduled for Tuesday after Chair Jerome Powell gave a clear signal in December that a series of rate cuts was in the pipeline for 2024.

Threats stemming from lingering inflation and geopolitical risks will prevent the ECB from lowering interest rates this year, Governing Council member Robert Holzmann said in an interview.

Treasuries look vulnerable after traders priced in what looks like too many interest-rate cuts from central banks, said Kellie Wood, deputy head of fixed income at Schroders Plc in Sydney. Her firm recently took profit on long positions in bonds, while maintaining bets on a steeper curve and holding inflation-linked debt. “Close to seven cuts this year seems excessive,” Wood said, after traders priced in as much as 170 basis points of reductions in the Fed rate on Friday. “The front end is overbought on positioning and loaded with profit, so that could signal a reversal” is coming, she added.