SYDNEY, Jan 17 — The dollar clung to a late week bounce today as investors braced for January’s US Federal Reserve meeting and raised bets it will chart a year ahead containing several rate hikes, while China cut borrowing costs to support a stuttering economy.

A Bank of Japan meeting which concludes tomorrow, British inflation data on Wednesday and Australian jobs figures on Thursday are also in view as traders gauge the global policy outlook.

An unexpected cut to some key lending rates in China highlighted it as the outlier, though it only briefly weighed on the yuan.

The dollar was 0.3 per cent higher at 114.47 yen late in the Asia session, about 0.8 per cent above a Friday low. It also edged a fraction firmer on the euro to US$1.1421 (RM4.78).

The moves follow a jump in yields and the dollar on Friday and underscore support for the greenback from the hawkish rates outlook, even if momentum for gains has started to wane.

The US dollar index, which declined sharply last week until Friday’s leap, sat at 95.225 in Asia today.

"Friday’s move suggests to me that the interest rate driver for dollar strength is not dead and buried,” said National Australia Bank’s head of foreign exchange strategy Ray Attrill.

He said it may not necessarily return to drive new dollar highs, but reckoned traders were on guard. "We’ve had a hawkish twist out of every Fed meeting since June last year,” he said.

The Fed meets January 25-26 and is not expected to move rates, but there is a growing drumbeat of hawkish comments coming from within and outside the central bank.

Last week, JP Morgan CEO Jamie Dimon remarked that there could be "six or seven” hikes this year and billionaire hedge fund manager Bill Ackman floated on Twitter over the weekend the possibility of an initial 50 basis point hike to tame inflation.

The cash Treasury market was closed for a holiday today but 10-year futures were sold to a two-year low in Asia and Fed funds futures fell, reflecting a strengthening conviction in the market of at least four hikes in 2022.

Global hikes loom; China cuts

Tugging against dollar gains is momentum for tightening almost everywhere else too, with Reuters reporting last week that even the ultra-accommodative Bank of Japan is debating how soon to begin telegraphing hike plans.

Inflation data on Wednesday could also help extend a month-long rally in sterling after it stalled around its 200-day moving average last week. It held at US$1.3669 today.

"Interest rate markets are currently pricing an 80 per cent + chance of a 25 bp rate hike by the Bank of England on 3 February,” said Commonwealth Bank of Australia strategist Joe Capurso.

"A quicker pace of inflation could see pricing move closer to 100 per cent.”

The outlier is China, where growth data today confirmed coronavirus restrictions were dragging on consumption and policymakers also announced a surprise cut to borrowing costs.

The People’s Bank of China (PBOC) said it was lowering the interest rate on US$110 billion worth of one-year medium-term loans by 10 basis points, surprising analysts who now reckon it is a harbinger of more to come.

"We could see more and that may, over time, help to stabilise the Chinese economy and that might be supportive of the commodity currencies,” said Bank of Singapore strategist Moh Siong Sim.

The yuan initially faded slightly as government bonds rallied on the rate cut, before firming about 0.1 per cent to 6.3450 per dollar.

The Australian and New Zealand dollars, which dropped sharply on Friday, remained under pressure. The Aussie hovered around Friday’s low at US$0.7200 and the kiwi around US$0.6798. — Reuters