Foreign exchange trading reminder: The dollar remains at a near six-week high, supported by expectations of further interest rate hikes

At the beginning of the Asian session on Tuesday (February 21), the US dollar index fluctuated narrowly and is currently trading around 103.94. The US stock market was closed on Monday because it coincided with the US President's Day.foreign exchange marketThe overall volatility was relatively small. Although the dollar index rose and fell back on Friday, it resisted further pullback pressure on Monday and stayed near a six-week high, closing close at 103.88 as traders bet that the Federal Reserve would maintain monetary policy tightening longer than initially expected, supported by strong U.S. economic data over the past few weeks.

In recent weeks, a series of data in the United States has shown that the labor market remains tight, inflation is stubborn, retail sales are growing strongly, and monthly producer prices are rising. Therefore, the market expects that the Federal Reserve has more work to do to contain inflation and will have to continue to raise interest rates.

"The dollar is likely to continue to strengthen in the coming week as recent economic data supports the idea that interest rates will stay higher for longer," said Carolina Kong, currency strategist at the Commonwealth Bank of Australia.

Markets now expect the federal funds rate to peak at just under 5.3 per cent by July.

The dollar was also supported by hawkish comments from Federal Reserve officials, who suggested further rate rises were needed to successfully curb inflation.

Similarly, two European Central Bank (ECB) policymakers said on Friday that eurozone interest rates still have some room to rise, boosting market expectations for a peak in ECB rates.

But that did little to boost the euro, which closed 0.09 percent lower at 1.0683 against the dollar on Monday.

"Hawkish comments from the ECB are unlikely to support the euro given the dollar rally," Mr. Kong said.

The Australian dollar led non-U.S. currencies higher against the U.S. dollar on Monday, as Asian stocks rose across the board on Monday as the market's appetite for risk-taking increased. The Australian dollar rose 0.42% against the U.S. dollar on Monday to close at 0.6905.

The New Zealand dollar rose 0.16% to close at 0.6250 against the dollar on Tuesday. The market is generally focused on the Reserve Bank of New Zealand's monetary policy meeting on Wednesday. It is expected that the Reserve Bank of New Zealand will only slightly slow its tightening pace and raise interest rates by 0.5 percentage points to 4.75%.

Analysts at ANZ said: "With inflation so high... not sticking with it could mean higher interest rates in the future."

The pound also closed close at 1.2038 against the dollar on Monday, and the composite purchasing managers' index (PMI) to be released on Tuesday will give more clues about the state of the British economy.

Figures published on Monday by Rightmove, the property website, showed that average asking prices for homes in the UK rose in February compared with the previous month, the smallest increase on record. Usually, house prices rise sharply in February each year.

But Rightmove said home asking prices were flat in the month, rather than falling, which could be a positive sign for the housing market, indicating a more modest landing than many analysts had predicted.

Markets are looking forward to the Bank of England's March policy meeting, with an 80% chance of a 25 basis point rate hike. The Bank of England has raised rates ten times in a row since the end of 2021, and the benchmark rate is currently 4%.

Traders will be closely watching speeches this week by Sam Woods and Catherine Mann, members of the Bank of England's monetary policy committee, for clues about the BoE's next move as it struggles to keep inflation down.

ING foreign exchange analysts said the focus remained on signs of progress on a potential deal to amend the Northern Ireland protocol, but the news had so far had little impact on the pound.

Chris Turner, FX analyst at ING, noted that monetary policy was the main driver for sterling, predicting that "the euro will remain range-bound against the pound and the pound will rebound against the dollar as the dollar moves".