THE US dollar was little changed on Friday (Dec 16) after rising in the previous session, as traders analysed a raft of central bank rate hikes and grappled with the prospect that borrowing costs still have a way to climb.

The euro was flat against the US dollar at US$1.063. That followed a 0.5 per cent fall on Thursday after the European Central Bank (ECB) raised interest rates and signalled it was far from finished, raising fears about the potential damage to the global economy and sending investors towards the safe-haven greenback.

A day earlier, Federal Reserve chair Jerome Powell said policymakers expected US rates to rise further and stay elevated for longer.

The "hawkish" rhetoric of central banks has caused traders to reconsider their bets that the pain due to rising interest rates might soon be over. That has triggered a sell-off in global stocks and European bonds on Thursday and Friday, supporting the US dollar and weighing on currencies considered more risky.

"Yesterday was a big 'risk-off', so typically the US dollar stands to benefit as a safe-haven asset," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

"In the short term we have a situation in which the market wants to sell US dollars, not withstanding yesterday's price action, but as we get into the new year we think that could reverse on account of the global growth slowdown."

Against Japan's yen, the greenback was down 0.49 per cent on Friday to 137.08. It was 0.07 per cent lower against sterling, with pounds changing hands at US$1.219.

The US dollar index, which gauges the currency against six major peers, was roughly flat at 104.48, after rallying more than 0.9 per cent on Thursday.

The index has surged around 9 per cent this year as the Fed has hiked interest rates hard, sucking money back towards US dollar-denominated bonds. Yet it has dropped roughly 8 per cent since hitting a 20-year high in September, as a slowdown in US inflation has raised hopes the Fed's rate-hiking cycle might soon end, and better than expected economic data from Europe has boosted the euro.

"The US dollar should weaken significantly in the next 6 to 12 months… but it's probably not going to be a one-way street," said Dominic Bunning, head of European FX research at HSBC.

"I think there is still room for this choppiness because it's an uneasy bullishness around risk appetite, it's an uneasy bullishness on risk currencies."

The Bank of Japan (BOJ) decides policy on Tuesday, and while no change is expected at that meeting, some market participants have begun betting on some tweaks to stimulus as governor Haruhiko Kuroda prepares to depart in April.

"I am with the market consensus and don't expect any policy change at the BOJ's December meeting, but I want to carefully watch for any comments from governor Kuroda about the next leadership," said Takahiro Sekido, chief Japan strategist at MUFG.

The risk-sensitive Australian dollar was 0.07 per cent lower at US$0.67. It slid 2.38 per cent in the previous session – its biggest drop since March 2020.

The New Zealand dollar rose 0.38 per cent to US$0.637. REUTERS

Media link: https://www.businesstimes.com.sg/companies-markets/us-dollar-holds-gains-after-rallying-rate-hikes