Dollar touches five-week high on US rate outlook

  • The dollar rose to five-week highs on Wednesday
  • Fed chair's testimony read as striking hawkish tone
Federal Reserve Board Chairman Jerome Powell testifies before the House Financial Services Committee in the Rayburn House Office Building on Capitol Hill February 27, 2018 in Washington, DC.
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Federal Reserve Board Chairman Jerome Powell testifies before the House Financial Services Committee in the Rayburn House Office Building on Capitol Hill February 27, 2018 in Washington, DC.

The dollar rose to five-week highs on Wednesday, bolstered by an upbeat assessment of the U.S. economy from the Federal Reserve's new chairman, which raised expectations the central bank could aggressively increase interest rates over the next two years.

The greenback in February was on track to post its best monthly performance since November 2016. Also helping the dollar was a euro that fell to six-week lows after euro zone inflation slowed to a 14-month low, underlining the European Central Bank's caution in removing stimulus in the region.

The dollar also rose to three-week highs against the Swiss franc, a two-week peak versus sterling and a two-month high against the Canadian dollar.

"The dollar has found tailwinds in America's sturdy economy and its hawkish central bank," said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington.

Fed Chairman Jerome Powell struck an optimistic tone about the U.S. economy on Tuesday, fueling views the U.S. central bank would raise rates four times this year rather than three.

Slightly disappointing U.S. data on Wednesday - a lower-than-expected second estimate of gross domestic product for the fourth quarter and a weaker-than-forecast report on the U.S. Midwest manufacturing sector - failed to dent the dollar's rally.

Data showed U.S. GDP expanded at a 2.5 percent annual rate in the fourth quarter, instead of the previously reported 2.6 percent pace, declining from the third quarter's brisk 3.2 percent. The Chicago purchasing management index was a weaker-than-expected 61.9 in February, compared with a consensus forecast of 64.2.

In trading the dollar index rose 0.2 percent to 90.56, after earlier notching a five-week peak.

Meanwhile, the euro has stumbled after a strong start to the year in which investors speculated that ECB would withdraw stimulus. The euro fell to a six-week low and was last down 0.15 percent at $1.2213.

Political developments are also making euro investors cautious. Italians are preparing to vote in a national election on Sunday, while the leading political parties in Germany decide on a coalition deal that would secure Angela Merkel a fourth term as chancellor.

Against the yen, however, the dollar fell 0.5 percent to 106.76 yen. The yen rose after the Bank of Japan on Wednesday trimmed the amount of super-long Japanese government bonds it offered to buy at its regular debt-buying operation. The yen, a safe-haven currency that attracts demand in times of economic uncertainty, also held firm after weak factory data from China undermined investor risk appetite.