Dollar still headed higher after correction in Fed betting

July 15 (Reuters) – The Fed doesn’t need to hike rates by 100 bps this month to prove it’s more committed to fighting inflation than the ECB or BOJ, so Treasury yield spreads over bund and JGB yields should remain attractive enough to turn dips into buying opportunities.

The question now, with the dollar index having rallied this week into a thicket of long-term resistance, is how big a correction might be.

With monthly RSIs at record highs some caution is advised, but to look for more than a short-lived dip, prices would have to close below the 38.2% Fibo of the post-June Fed meeting 103.41-109.29 rise at 107.04.

Even if the Fed hikes by 75 bps on July 27, rather than the extreme 100 bps briefly priced in after Wednesday’s hot CPI readings, the fed funds rate will still rise to 3.5% by year-end, versus maybe 1% for the ECB and nil from the BOJ, so a dollar index rise closer to 2001’s 121.02 peak remains possible.

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