US dollar climbs to near two-year peak on prospect of sizable Fed rate hikes

The dollar surged to a nearly two-year high after minutes of the last Federal Reserve meeting reinforced expectations of multiple half percentage-point rate increases to control soaring inflation.

According to Reuters, the dollar index, which measures the greenback’s value against six major currencies, climbed to 99.7780 , its strongest level since late May 2020. It was last up 0.1% at 99.588.

Fed officials viewed the hefty rate increases as appropriate at future meetings, especially if inflation pressures intensify, minutes showed. They would also have preferred a 50 basis point rise in the target range for the federal funds rate at the March meeting.

Fed officials also agreed to reduce the balance sheet by $95 million per month – $60 billion of its Treasury holdings and $35 billion of mortgage-backed securities – over three months, according to the minutes of the March meeting.

Analysts at Action Economics said the $95 billion balance sheet run-off was close to expectations of $100 billion per month.

The U.S. currency also hit the nearly two-year milestone on Tuesday after Fed Governor Lael Brainard, usually a more dovish policymaker, said she expected a combination of rate increases and a rapid balance sheet runoff to bring U.S. monetary policy to a “more neutral position” later this year. Further tightening would follow as needed, she added.

Analysts said the Fed minutes were less hawkish than Brainard’s comments.

The dollar held gains against the yen, which tracks U.S. two-year yields reflecting Fed policy expectations, trading up 0.1% at 123.78 yen. .

The euro, on the other hand, was little changed versus the dollar, after falling to its lowest in a month as the prospect of new Western sanctions on Russia and the upcoming French presidential election added to pressure to the European currency.

Europe’s single currency benefited earlier from strong euro zone producer prices for February, which surged 31.4% year-on-year in February.

The euro was last slightly down at $1.0896, after briefly touching a nearly one-month low of $1.0874.