Dollar holds firm on hawkish Fed bets, Aussie tad higher after RBA

TOKYO: The US dollar held firm against major peers on Tuesday (Dec 6), following its biggest rally in two weeks after strong services data in the United States fuelled bets the Federal Reserve may lift interest rates more than recently projected.

The Australian dollar perked up from near one-week lows after the Reserve Bank of Australia (RBA) raised rates for the eighth time in as many months, with an accompanying statement that was slightly less dovish than market participants had expected.

The US dollar index - which measures the currency against six major peers - changed hands at 105.27 in Asian trading, steady after Monday's 0.7 per cent rally, its biggest since Nov 21.

It had dipped to 104.1 for the first time since Jun 28 as traders continued to rein in bets of aggressive Fed tightening.

However, it later reversed course as the Institute for Supply Management's (ISM) non-manufacturing PMI unexpectedly rose, indicating the services sector, which accounts for more than two-thirds of US economic activity, remained resilient.

The Federal Open Market Committee decides on policy on Dec 15. Traders currently expect a half-point hike to a 4.25-4.5 per cent policy band and a terminal rate of just above 5 per cent in May.

"The dollar really kicked butt across the board," said Bart Wakabayashi, branch manager at State Street in Tokyo. "I think there was some positioning short dollars, and all the overnight economic releases from the US were very strong and pointed to a hawkish Fed. They'll raise rates as long as the data shows they need to."

US long-term Treasury yields climbed the most since Oct 20 overnight, sending the yield-sensitive dollar-yen pair 1.83 per cent to as high as 136.835. The dollar continued to have an edge on Tuesday, with the yen at 136.94.

The euro was also flat after an early light rebound, at US$1.05 following a 0.46 per cent slide overnight. Sterling recovered 0.16 per cent to US$1.22 after Monday's 0.88 per cent retreat.

The Aussie dollar rose 0.6 per cent to US$0.67, clawing back some of a 1.4 per cent overnight tumble after the RBA said it was not on a preset course to tighten policy but that inflation was still high. Investors had been on the watch for signs of a pause in tightening after inflation unexpectedly cooled last month.

The RBA lifted its cash rate by 25 basis points to a 10-year peak of 3.1 per cent and does not meet again until February.

"Whilst the RBA have spoken of a pause publicly, we may not be as close to one as I originally thought," said Matt Simpson, a senior analyst at brokerage City Index in Brisbane.

"And with the RBA expecting inflation to continue higher and household spending remaining strong as ever, then the RBA may well hike by another 25 bps in February and March before reassessing."

In recent days though, RBA policy has taken a back seat to optimism about an easing of strangling COVID-19 restrictions in China, a top trading partner.

The Aussie reached a 2-1/2-month peak of US$0.60 on Monday, with sources telling Reuters a policy shift in Beijing around COVID-19 could come as soon as Wednesday.

"The story of the past week - and it's really been a driver of dollar selling - has been the expectation of some sort of relief from China's zero-COVID policy, and that of course has huge implications for global trade and the supply chain issues that have been driving global inflation," said Wakabayashi.