Dollar climbs to five-week peak on US rate view

NEW YORK: The dollar rose to five-week highs on Wednesday, bolstered by an upbeat assessment of the US economy from the Federal Reserve's new chairman, which raised expectations the central bank could aggressively increase interest rates over the next two years.

The greenback in February posted its best monthly performance since November 2016.

Also helping the dollar was a euro that fell to six-week lows after euro zone inflation slowed to a 14-month trough, underlining the European Central Bank's caution in removing the region's stimulus.

The dollar also rose to three-week highs against the Swiss franc, a two-week peak versus sterling, and a two-month high against the Canadian dollar.

Fed Chairman Jerome Powell struck an optimistic tone about the US economy on Tuesday, fueling views the Fed would raise rates four times this year rather than three. His comments boosted US Treasury yields, pressured stocks, and lifted the dollar.

Treasury yields, however, retreated on Wednesday.

On Thursday, the Fed chief will deliver more testimony in front of the Senate Banking Committee. Powell is expected to deliver another hawkish statement to the Senate body.

Mark McCormick, North American head of FX strategy at TD Securities, believes the rally in the dollar against the major currencies is largely about positioning, which should limit the sustainability of the greenback's rebound.

More importantly, he said the "dollar is running cheap to current (Treasury) spreads, so it only needs to play catch-up to the recent moves to get some additional support."

Slightly disappointing US data on Wednesday - a slight downgrade in gross domestic product growth for the fourth quarter and a weaker-than-forecast report on the US Midwest manufacturing sector - failed to dent the dollar's rally.

In late trading, the dollar index rose 0.3 percent to 90.657, after earlier notching a five-week peak.

Meanwhile, the euro has stumbled after a strong start to the year in which investors speculated that ECB could withdraw stimulus. The euro fell to a six-week low and was last down 0.3 percent at $1.2196.

Political developments are also making euro investors cautious. Italians are preparing to vote in a national election on Sunday, while the leading political parties in Germany decide on a coalition deal that would secure Angela Merkel a fourth term as chancellor.

Against the yen, however, the dollar fell 0.6 percent to 106.70 yen. The yen rose after the Bank of Japan on Wednesday trimmed the amount of super-long Japanese government bonds it offered to buy at its regular debt-buying operation.