Dollar advances as traders consider higher-for-longer rates view

The dollar index, which measures the U.S. currency against six major peers, was at 105.17, just below the seven week peak of 105.32 it touched on Friday after hotter-than-expected data. The index is up 3% for February and set to snap a four-month losing streak.

The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred gauge of inflation, shot up 0.6% last month after gaining 0.2% in December, according to data on Friday.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 1.8% last month, according to the Commerce Department. Economists polled by Reuters had forecast consumer spending rebounding 1.3%.

Rodrigo Catril, senior currency strategist at National Australia Bank, said the data depicted a U.S economy running too hot at the start of the year, increasing the urgency for the Fed to tighten further over coming months.

“The reality is that the U.S economy has started 2023 from a stronger position than many of us had expected.”

The market is now pricing U.S. interest rates to peak at 5.4% in July and remain above 5% through the end of the year.

Still, Fed policymakers speaking on Friday did not push for a return to last year’s jumbo rate hikes, suggesting that for now central bankers are content to stick to a gradual tightening path despite signs that inflation is not cooling as they had hoped.

The Fed is expected to raise rates by 25 basis points at its March 21-22 meeting, though some analysts see the possibility of a 50 basis points hike if inflation stays high and growth remains strong.

“We now believe it is a much closer call that officials hike by 50 basis points in March than our earlier 25 basis points assumption,” said Kevin Cummins, chief economist at NatWest Markets.

“We put the odds at about 60% that the FOMC hikes by 50 bps.”

The data also led to markets nudging up the likely rate tops for the European Central Bank and the Bank of England.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 0.4 basis points at 4.809%, just shy of the three-month high of 4.840% it touched on Friday.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes , seen as an indicator of economic expectations, was at -87.7 basis points.

The euro was up 0.08% to $1.0554, coming off the seven week low it hit on Friday. Sterling was last trading at $1.1959, up 0.13% on the day

The Japanese yen strengthened 0.15% to 136.26 per dollar, having slipped to more than two month lows of 136.58 earlier in the session.

The Australian dollar rose 0.12% to $0.673, while the kiwi advanced 0.13% versus the greenback to $0.617.