Aurelia Butler

BENGALURU (Reuters) – The U.S. dollar will reign supreme for at least another 3-6 months, a Reuters poll of strategists found, saying it will take a significant change in market expectations for Federal Reserve rate hikes to push it higher.Indeed, while the dollar was not expected to make any significant headway from current levels, it was forecast to hold onto most of its impressive gains from 2021, according to the Jan. 31-Feb. 2 Reuters poll. Multi-decade high inflation in the United States and swathes of the rest of the world has prompted the Fed and other central banks to dial back some of the stimulus measures enacted during the COVID-19 pandemic. That sudden change in policy expectations sent equity prices into a tailspin last month, with the benchmark S&P 500 index marking its worst start to the year since the financial crisis.U.S. Treasuries have also taken a pasting, with yields rising by some measures at their fastest pace since 2009 in January as traders bet on a quicker pace of Fed tightening.That is fertile ground for the dollar to consolidate its strong position. The dollar index rose nearly 7% in 2021, its best performance since 2015, but is up just 0.2% this year so far.”Over the short term, we think the dollar is going to be more supported by the fact markets are still adjusting to this more hawkish U.S. rate profile. That’s going to give the dollar some strength,” said Simon Harvey, head of FX analysis at Monex Europe, the most accurate forecaster for major currencies in Reuters polls for 2021 according to Refinitiv Starmine. (Reuters poll graphic on FX majors forecasts: https://fingfx.thomsonreuters.com/gfx/polling/zjvqkawbovx/Reuters%20Poll-%20Dollar’s%20dominance.png)Over 75% of respondents to an additional question, 33 of 43, said the dollar’s dominance would last at least another 3-6 months. Among those, 14 said that specific time period, 11 said 6-12 months and eight said more than a year.Among the remaining 10, eight picked less than three months and only two said it was already over.EURO GAINSAsked how many additional basis points of Fed tightening need to be priced in for this year for the dollar to trade significantly higher, 24 analysts returned a median of 62.5 basis points. That was on top of the roughly 125 basis points currently priced in for the year.Predictions ranged from 25 basis points to 200.Fed officials played down the chance of a half point rate hike in March on Wednesday, knocking the dollar index off its recent 19-month high of 97.441. That broadly has cast doubts over whether the Fed could tighten policy to the extent financial markets were pricing in.Federal funds futures imply U.S. interest rates will peak at just 1.75%-2.0% in the current cycle. That was lower than the 2.25%-2.50% economists predicted in a separate Reuters poll last month.”I think there are warning signs out there about the medium term dollar outlook,” said Jane Foley, head of FX strategy at Rabobank.”What really worries me is that flattening of the yield curve … I think the market is saying the Fed is walking a very narrow path, and if it hikes too much this is going to be a very short interest rate hiking cycle and we could have potentially a hard landing on the other side.”The euro was forecast to erase some of its losses for the year and gain over 1.5% over the next 12 months. Those gains would still fall short of recouping an almost 7% loss against the dollar last year.The Japanese yen, which has benefited from the flare-up in geopolitical tensions and the ensuing flight to safety, was up 0.75% for the year but was expected to give up those gains and drift down 1.5% in a year.”We’re expecting the dollar to be resilient against low-yielding currencies where monetary policy is a lot slower to react,” added Harvey from Monex Europe. More

(Reuters) – U.S. President Joe Biden’s nominees to the Federal Reserve Board came out swinging against high inflation on Wednesday, saying rising prices pose a threat to economic growth and stopping that trend is a paramount task for the central bank.”Our most important task is tackling inflation,” Michigan State University economics professor Lisa Cook, one of three Fed nominees up for a confirmation hearing at the U.S. Senate on Thursday, said in her prepared remarks. The Fed must “ensure that inflation declines to levels consistent with its goals,” wrote nominee Philip Jefferson, dean of faculty at Davidson College, while former Fed governor Sarah Bloom Raskin said reducing inflation must be a “top priority while we continue to sustain our economic recovery.”The three Fed nominees had been widely seen as leaning dovish, in part because Cook’s research focused on inequality and Jefferson’s on poverty, suggesting that they might tolerate inflation for the sake of a stronger labor market. Their written testimony released Wednesday strongly countered that assumption. Consumer prices rose 7% last near — more than twice the Fed’s 2% goal — cheapening American wages, eating into household budgets, and becoming an increasing political liability for Biden, whose popular standing has suffered as inflation has soared. Fed policymakers have signaled they will start raising interest rates next month, perhaps at a pace not seen in decades, as they scramble to cut short the upward price trend that threatens to undermine the recovery from the pandemic recession. The remarks from the nominees suggest they will join in those efforts once confirmed. FOLLOWING VOLCKER Still, Thursday’s hearing, scheduled for 8:45 a.m. E.T., promises to be a heated one.Democrats have praised the nominees, and Republicans have panned them, taking particular issue with Raskin and what they see as her intent to use her position as the Fed’s vice chair of supervision to starve oil and gas companies of credit. The White House has stepped in to try to turn the tide. Raskin in her testimony said it is not the Fed’s role to tell banks where to lend. Cook and Jefferson, both Black economists whose addition to the currently all-white Fed Board would make it the most racially diverse in the central bank’s 108-year history, have received far less attention. But their monetary policy views could be consequential as the Fed joins its first real battle with inflation in decades. Cook in her testimony invoked Paul Volcker, the Fed chair who personified the central bank’s battle with 1970s inflation, saying she would follow his example of political independence.”High inflation is a grave threat to a long, sustained expansion, which we know raises the standard of living for all Americans and leads to broad-based, shared prosperity,” Cook said. “That is why I am committed to keeping inflation expectations well anchored.”Jefferson also warned the inflation spike could lift inflation expectations. “The Federal Reserve must remain attentive to this risk and ensure that inflation declines to levels consistent with its goals,” he said. Nominees must win approval from a majority on the Democrat-controlled Senate Banking committee before their consideration by the closely divided full Senate. A tentative date for a vote on Biden’s nominees, including the renomination of Fed Chair Jerome Powell and the elevation of Fed Governor Lael Brainard to the post of Fed vice chair, has been set for Feb. 15. More

WASHINGTON (Reuters) – Sarah Bloom Raskin, President Joe Biden’s pick to lead the Federal Reserve’s regulatory work, plans to tell lawmakers she does not believe the role includes telling banks where they should be lending.In prepared testimony posted by the U.S. Senate Banking Committee on Wednesday ahead of her nomination hearing on Thursday, Raskin said the role of vice chair for supervision requires broad consultation inside and outside of the Fed on how best to ensure banks are managing their risks. But that job does not include telling banks where they should be lending, a rebuttal to accusations from Republicans and some industry groups that she might discourage banks from investing in fossil fuels in her capacity at the Fed.”The role does not involve directing banks to make loans only to specific sectors, or to avoid making loans to particular sectors. And the role exists within the laws passed by Congress that govern the Federal Reserve and its responsibilities,” her prepared testimony states.Raskin, a former Fed governor and senior Treasury official under President Barack Obama, is widely expected to press for stricter scrutiny of banks than when Fed bank oversight was run by Randal Quarles, a Republican who left the Fed in December.In her prepared testimony, Raskin said the 2008 financial crisis shows bank supervisors must be attentive to risks “no matter where they come from,” mentioning everything from cyberattacks to “cataclysmic weather-related events” as meriting scrutiny. More

FRANKFURT (Reuters) – The European Central Bank is all but certain to keep policy unchanged on Thursday but may have to acknowledge that inflation could stay high for longer than it had projected, a signal that may be taken by some as a hint at a faster exit from stimulus. Having extended support measures only in December, any policy change now would be premature. Yet inflation has consistently exceeded the ECB’s forecasts, piling pressure on policymakers to fine-tune their increasingly questioned narrative that rapid price growth is merely temporary.The bank argues that inflation will soon abate without its intervention and that long-term price pressures are actually too weak, meaning support is still needed to underpin inflation which undershot the ECB’s 2% target for much of the last decade.This view is now being challenged by investors and several policymakers, and January’s 5.1% inflation print, the highest ever for the 19-country euro zone, only adds to pressure for ECB President Christine Lagarde to acknowledge mounting risks.”The ECB’s hopes for a rapid decline in the inflation rate are fading,” Commerzbank (DE:CBKG) economist Christoph Weil said. “The pressure on the central bank to exit its ultra-expansive monetary policy as early as 2022 is increasing.”But changing the inflation narrative is a tricky and potentially risky exercise.Markets already doubt the ECB and are pricing in 30 basis points of rate hikes this year, despite its insistence that any move in 2022 is very unlikely.If Lagarde admits that the ECB has underestimated price pressures, markets will bring forward rate-hike bets, tightening financing conditions and offsetting the very stimulus the ECB aims to provide. CREDIBILITYBut with the bank’s credibility already challenged by a string of forecasting errors and big upward revisions to projections, Lagarde also cannot ignore the inflation overshoots.Instead, she may offer a token nod to inflation risks while emphasizing that price growth in Europe is fundamentally different to that in the United States given weak wage pressures and the relative lag in rebounding consumption.The U.S. Federal Reserve is signalling a first rate hike in March although officials spoke cautiously on Monday https://www.reuters.com/business/fed-officials-say-march-rate-hike-track-future-increases-data-dependent-2022-01-31 about what might follow. The Bank of England is meanwhile expected to raise rates again on Thursday and signal that it will start gradually reducing its vast holdings of government bonds, bought to stimulate Britain’s economy.With unemployment also falling to a record low, Lagarde may need to acknowledge that labour markets are tightening more rapidly than expected, even if so far that has not brought significant wage pressures. But her main message is still likely to be that no rate move is coming this year, a framing that keeps the door open to an increase in borrowing costs early in 2023.Long more cautious than markets, analysts too are now moving forward their rate hike predictions. While a Reuters poll last month saw a first ECB rate increase coming towards the fourth quarter of 2023, a growing number now see a hike as early as Q1.”For now, we have pencilled in the first rate hike for early 2023, but an increase at the end of this year is increasingly likely,” said Andrew Kenningham, chief Europe economist at Capital Economics. Lagarde is unlikely to change her view that inflation will come back under target before year-end, however – an important provision that should keep rate hike expectations at bay. The ECB will announce its policy decision at 1245 GMT and Lagarde holds a news conference at 1330 GMT.The ECB is set to keep the deposit rate at a record-low minus 0.5% and stay on course to phase out its 1.85 trillion euro pandemic emergency bond buying scheme by the end of March. More

BBC Radio Ulster said Paul Givan has written his resignation letter, which is expected to be made public later © Clodagh Kilcoyne/Reuters

Northern Ireland’s first minister was reportedly poised to tender his resignation amid an intensifying row over checks on food and agricultural goods entering the region from Great Britain under post-Brexit trading rules.BBC Radio Ulster reported today that Paul Givan of the Democratic Unionist party, who heads the power-sharing executive, had written his resignation letter and it was expected to be made public later by DUP leader Sir Jeffrey Donaldson. It was not immediately clear if the resignation would take immediate effect.There was no immediate confirmation from the DUP, but the possibility of its pulling out of the Stormont executive, in which it rules alongside the nationalist Sinn Féin party, has been flagged in recent days by Donaldson. Givan’s exit would trigger that of Michelle O’Neill, the deputy first minister from Sinn Féin, weeks before regional elections on May 5. Other ministers would remain in place but the budget, which is under consideration, would be put on hold.The possibility of Givan’s departure came hours after Edwin Poots, the DUP’s agriculture minister, ordered a halt to agricultural checks on goods from midnight. The DUP has spearheaded unionist opposition to Irish Sea border checks imposed by Brexit — under arrangements known as the Northern Ireland Protocol — to avoid a return to a hard border on the island of Ireland.Hauliers, speaking after talks with UK and Northern Irish officials, confirmed the agricultural checks had not yet been halted. John Martin of the Road Haulage Association said officials in the Northern Irish agriculture ministry were taking legal advice on the order, which contravenes the UK’s withdrawal agreement from the EU.Doug Beattie, head of the Ulster Unionist party, said pulling Givan out of the executive would create further destabilisation and “at the end, the protocol will still be there”. More

Rishi Sunak will join forces with the Bank of England on Thursday in an attempt to put the brakes on inflation, as he sets out plans to stop soaring energy bills causing a “cost of living catastrophe”.The chancellor will announce plans to slash hundreds of pounds from soaring domestic energy bills from April, seeking to control prices at a time when inflation had been expected to peak at close to 7 per cent.Meanwhile Andrew Bailey, BoE governor, is predicted to announce a rise in interest rates from 0.25 per cent to 0.5 per cent, confirming that fiscal and monetary firepower are both being deployed to hold down prices.The co-ordinated announcements are intended to calm nerves among consumers and in the markets, as Ofgem, the energy regulator, announces its plan for a sharp lift in Britain’s energy price cap from April.Ofgem moved forward to Thursday its announcement about the new level of the cap, which dictates bills for 22mn homes, from its original scheduled date of February 7. Analysts are expecting an increase in the cap of around £650 to more than £1,900 per household per year. Sunak will immediately respond with a House of Commons statement setting out how he intends to avoid what the Resolution Foundation think-tank has called a “cost of living catastrophe” unfolding.

The chancellor is expected to cut £200 from all household energy bills, according to those briefed on his plans, with money loaned to power companies which will be passed directly to consumers.Sunak will attempt to claw back that money later, when wholesale energy prices fall, through a levy on future bills, according to people briefed on the plan. “Good headlines today at the risk of bad headlines in future,” said Resolution Foundation chief Torsten Bell.The chancellor has also promised targeted help for the most vulnerable households, far beyond the existing help available through the “warm homes discount” scheme, currently worth £140 for 2.7mn households.According to those briefed on his thinking, Sunak wanted to expand that support to the 8.5mn households that receive universal credit and other state help. The Times reported that one mechanism to deliver help to less well-off households would be via rebates on council tax bills for properties in Bands A-C. The Treasury declined to comment on “speculation”. Sunak’s main aim is to cushion households from a big increase in energy bills in April at the time when a £12bn annual increase in national insurance rates kick in. Income tax thresholds are also being frozen. Key local elections take place a few weeks later on May 5.Most economists expect consumer price inflation to rise from the 5.4 per cent level seen in December to a peak of close to 7 per cent in April, mostly as a result of higher gas and electricity prices. The discount on bills would shave around 0.4 percentage points from that peak level, lowering it to around 6.6 per cent, a figure that would still be the highest in more than 30 years.

The BoE would be unlikely to limit interest rate rises on the basis of this subsidy because it is more focused on the projection for inflation two to three years into the future. Meanwhile, the Treasury should benefit from a corresponding reduction in retail price inflation by lowering the cost of servicing its inflation-linked gilts, which are based on the RPI. Reducing the RPI figure by around 0.4 percentage points would save the Treasury about £2bn a year on almost £500bn of outstanding index-linked gilts. Energy industry executives are warning that measures taken now to ease the pain of April’s price increase could prolong the energy price crisis for years, as loans to suppliers to fund the £200-per-home rebate will have to be recouped via bills for years to come.Energy companies have also questioned whether the measures will have to be repeated in October, when analysts anticipate a further sharp increase in the price cap to as much as £2,450 per year, based on forward energy prices.Cornwall Insight, a consultancy, has also cautioned the cap may have to remain at historically high levels well into 2023. It is currently forecasting the cap in April 2023 will probably have to be nearly £1,850. More