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Market Extra: Dollar gauge poised to finish week little changed, with currency traders unfazed by Federal Reserve’s hawkish pivot

The U.S. dollar index is poised to end the week practically unchanged, despite the release of Federal Reserve minutes showing a hawkish pivot away from easy policy, which led to stock-market selloffs and greater expectations for aggressive tightening in the months to come.

The index DXY, -0.62%, which has traded within a relatively narrow range throughout the first week of the new year, hovered around 95.7 on Friday — a touch below where it was on Monday.

Theoretically, the dollar should be moving up along with the prospect of higher rates in the U.S., but much also depends on what’s going on in the rest of the world. In this week’s case, currency traders appear to be more focused on where U.S. interest rates will end up, and less on how aggressively they begin, according to Tom Nakamura, a currency strategist and co-head of fixed income at AGF Investments in Toronto.

“There’s a bit more focus on not necessarily what rate moves are coming in the next few months, but whether we are just pulling forward rate hikes and getting a cycle that’s more front-loaded but leaves us in the same place as we would have been in six months anyway,” Nakamura said via phone on Friday.

“It’s fair to say that, typically, as the market approaches the first Fed hike, we should see the dollar broadly appreciate,” he said. “That’s not really held up in this case, though, particularly because the rest of the world’s central banks are following along, more or less, at a point when peak growth is behind us and might limit how far the Fed can go.”

The lack of movement in the dollar was accompanied by a patten of low volatility that’s prevailed in the around-the-clock currency market over the past few weeks, according to Jonathan Petersen, a markets economist at Capital Economics. Not even December’s disappointing U.S. non-farm payrolls report left much of impact on the currency market, he wrote in a note.

Read: U.S. gains scant 199,000 jobs in December as businesses confront labor shortage and omicron

That wasn’t the case for the rates market, though, where rates traders focused on the more positive elements of the jobs data and continued to price in sooner and faster tightening by the Fed. Meanwhile, U.S. stock indexes except for Dow industrials DJIA, +0.29% were trading mostly lower Friday afternoon in a turbulent session in which the monthly employment report offered something for both optimists and pessimists.

Beyond the dollar, emerging-market currencies like the South African rand, Hungarian forint and Chilean peso held up surprisingly well this week on expectations that the more rate hikes the Fed delivers this year, the less emerging-market central banks will need to do “because the burden will be shared” in the struggle to contain persistently higher inflation, Nakamura said.

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