Dollar has tech, risk-off props, but peak Fed view a hindrance

Aug 10 (Reuters) – The dollar index rallied sharply to start the new year on a combination of technical support and an unexpectedly large drop in German inflation, but rebounds will face resistance from the view that the Fed is much closer to peak rates than the ECB, BoE and BoJ.

Tuesday’s 103.46-4.86 index range came off December and January trend lows and the dollar’s lowest point since the Fed began raising rates by 75bp increments in June.

Even before the Fed’s final two 75bp rate hikes, 2-year Treasury-bund yield spreads had begun falling in anticipation of the Fed reaching its terminal rate before the ECB.

Futures foresee the Fed peaking just below 5% by mid-year and then cutting roughly 100bp over the following 12 months as US CPI has already fallen from a 9% peak in June to 7.1% in November.

Tuesday’s German HICP was still at 9.6%, despite a one-off government payment of household energy bills. The Bundesbank sees German inflation at 7.2% this year and 4.1% in 2024, making the ECB’s 3.4%, Q3 rate hiking peak look underpriced and a recovery of 2-year Treasury-bund yields spreads and the dollar index dominated by unsustainable.

(Randolph Donney is a Reuters market analyst. The views expressed are his own.)