Dollar firm as Fed members map road to rate hike

© Reuters. FILE PHOTO: Stacks of former U.S. President Abraham Lincoln on the five-dollar bill currency are seen at the Bureau of Engraving and Printing in Washington March 26, 2015. REUTERS/Gary Cameron

By Wayne Cole

SYDNEY (Reuters) - The dollar was poised to push higher on Thursday as hawkish comments from the U.S. Federal Reserve led markets to bring forward the likely timing of a policy tightening there, while action in Europe and Japan remain distant prospects.

The euro was flat at $1.1835, having recoiled from a top of $1.1899 overnight after failing to crack resistance around $1.1910. The dollar also reached 109.67 yen, from a trough of 108.71 on Wednesday, negating what had been a bearish break to the downside.

The rally came after Fed Vice Chair Richard Clarida said conditions for an interest rate hike could be met in late 2022, setting the stage for a move in early 2023.

He and three other Fed members also signalled a move to taper bond buying later this year or early next depending on how the labour market fared in the next few months.

"It is reflective of a hawkish drift among the committee about the risks of more persistent inflation, and what that might mean for achieving the Fed's new inflation framework," said Brian Daingerfield, an analyst at NatWest Markets.

"This is all to say that the stakes for Friday's payrolls, and subsequent payrolls, are sky high."

Predicting the jobs report with any confidence remains particularly tricky as the spread of the Delta variant and labour bottlenecks roil the market.

Thus, while the median forecast for payrolls is 870,000 the range of estimates stretches from 350,000 to 1.6 million.

Adding to the murkiness were Wednesday's mixed data where a surprisingly weak ADP report on private hiring clashed with the strongest ever reading for U.S. services.

Clarida's comments led investors to price in slightly more chance of a hike in late 2022/early 2023 and to a flattening of the Treasury yield curve as short-term yields rose.

Such a move would likely come well ahead of any tightening by the European Central Bank, which is still battling to get inflation near its target.

In contrast, the Bank of England is much nearer to tapering and could expand on timing at a policy meeting later on Thursday.

That outlook helped the pound rally early in the year, though it has gone largely sideways on the last couple of months. It was last pinned near support at $1.3884, having repeatedly failed to clear resistance above $1.3980.

All these central banks are laggards compared with the Reserve Bank of New Zealand (RBNZ), which seems likely to hike rates at its next policy meeting on Aug. 18, making it the first in the developed world to move since the pandemic hit.

A super-strong jobs report on Wednesday only added to the case for New Zealand tightening and sent the kiwi surging to a one-month peak of $0.7088 overnight, before steadying at $0.7041.

"NZ's economy has almost closed its output gap and will risk overheating if stimulus is not reduced," said Westpac's head of NZ strategy Imre Speizer. "Markets are fully pricing a 25 bps rate hike, and are flirting with some chance of 50 bps."

He recommended buying the kiwi on any pullback to $0.7005, for a target of $0.7300.