The U.S. dollar held steady against its major rivals on Tuesday, a day after its biggest gain in two weeks. This was due to strong data from the United States on services, which fueled speculation that the Federal Reserve would raise interest rates more than expected.
After the Reserve Bank of Australia (RBA) raised rates for the eighth time in as many months and made a statement that was a little less dovish than market participants had expected, the Australian dollar went up from lows that were close to a week old.
The U.S. dollar index, which compares the dollar to six major currencies, was unchanged at 105.27 in Asian trading after a 0.7% rise on Monday, which was the biggest gain since November 21.
Related: Before Powell’s speech, the dollar is about to have its worst month since 2010.
It had gone down to 104.1 for the first time since June 28 as traders kept putting less money on bets that the Fed would tighten money too quickly.
Later, though, it changed direction when the Institute for Supply Management’s (ISM) non-manufacturing PMI rose by more than expected. This showed that the services sector, which makes up more than two-thirds of the U.S. economy, was still strong.
On Dec. 15, the Federal Open Market Committee decides what to do. Traders expect a half-point increase to a policy band of 4.25–4.5% and a final rate just above 5% in May.
Bart Wakabayashi, branch manager at State Street (NYSE:STT) in Tokyo, said, “The dollar really kicked a** everywhere.” “I think some people were short dollars, and all the economic news from the U.S. overnight was very strong and pointed to a hawkish Fed.” “Rates will go up as long as the data show that they need to.”
Overnight, long-term U.S. Treasury yields went up the most since October 20. This made the dollar-yen pair, which is sensitive to yields, go up by 1.83% to as high as 136.635. On Tuesday, the dollar was still stronger than the yen, which was worth 136.94 yen.
The euro was also flat at $1.0492 after a light rebound early in the day. It had dropped 0.46% overnight. After falling by 0.88% on Monday, sterling went up by 0.16% to $1.22035.
The Aussie dollar went up 0.6% to $0.6738, regaining some of the 1.4% it lost overnight after the RBA said it wasn’t on a set path to tighten policy but that inflation was still high. After inflation dropped out of the blue last month, investors were looking for signs that the Fed would stop tightening.
The RBA raised the cash rate by 25 basis points to 3.1%, which is the highest level in 10 years. The next meeting of the RBA won’t be until February.
“The RBA has talked about a pause in public, but we might not be as close to it as I thought at first,” said Matt Simpson, a senior analyst at the Brisbane brokerage City Index.
“The RBA thinks that inflation will keep going up, and household spending is still as strong as ever.” This means that the RBA may raise interest rates by another 25 basis points in February and March before reevaluating.
In recent days, though, RBA policy has taken a back seat to hopes that China, a major trading partner, will loosen its strict COVID-19 rules.
Related: Unrest in China caused by COVID causes the dollar and yuan to fall.
On Monday, the Aussie reached a 2-1/2-month high of $0.6851. Sources told Reuters that Beijing could change its policy on COVID as soon as Wednesday.
“The big story of the last week, and a big reason why the dollar has been falling, has been the hope that China’s zero-COVID policy will be eased in some way,” said Wakabayashi. “This has huge implications for global trade and the supply chain problems that have been driving global inflation.”