Big Week for Central Banks, Dollar Drops as US Yield Curve Flattens

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On Monday, the Treasury yield curve flattened to its lowest level in almost a year as speculation about a hefty Federal Reserve rate hike in March gained steam, putting extreme pressure on shorter-dated tenors 

This year’s rate hikes will be faster

While the Fed’s meeting last week signaled a rate hike in March, some investors believe officials are prepping the markets for a faster pace of rate rises this year to keep inflationary pressures at bay. In a phenomenon known as “bear-flattening,” the difference between two and ten-year US Treasury rates dipped below 59 basis points for the first time since early November, indicating that a faster pace of rate hikes is lowering future growth forecasts.

After surging to a mid-2020 high of 97.44 on Friday, the greenback fell 0.2 percent to 97.02 against a basket of competitor currencies. Last week’s 1.6 percent increase in the dollar was the most significant weekly gain since mid-2021. This year, long dollar positions stayed near their all-time highs, reported. 

Possible to pursue a more aggressive strategy

 According to BNN Bloomberg, traders are currently betting that the Fed will tighten by 32 basis points in March, more than ultimately pricing a quarter-point hike. The estimated chance of a 50-basis-point hike now stands at about 30%. In December, the chances of such a move were nil.

In December, consumer prices increased by 7% annually, the fastest rate in four decades. At each meeting, Powell left the prospect of raising rates openly, and he didn’t rule out a 50-basis-point hike. In an interview with the Financial Times, Bostic reiterated his proposal for three quarter-point interest rate rises in 2022 but added that a more aggressive strategy may be taken if the economic statistics merited it. This year, Bostic is a non-voting member of the FOMC.

The difference between ten-year peers, which rose nearly half, has narrowed to the smallest since October 2020. The last time the Fed raised borrowing prices by a half-point was during the dot-com bubble in 2000. The repricing followed a move made last week by Fed Chair Jerome Powell, who emphasized the policymaker’s desire to keep inflation under control. Hedge funds that had been leaning the wrong way before Powell’s speech may have exacerbated the market positioning.

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