Dollar buoyed by bets on US rate hikes

The US dollar has strengthened recently, trading near multi-week highs ahead of a Federal Reserve decision expected to signal the first of several potential interest rate hikes. Analysts predict a modest boost for the dollar following a potential 25 basis-point increase, but there's a small chance it could fall if the Fed raises rates, depending on Fed Chair Kevin Warsh's comments during a press conference.

If the Fed does not hike, the dollar could experience a significant 1%+ decline. The dollar has gained momentum alongside yields overnight, weakening against the yen and the New Zealand dollar, with the kiwi reaching a two-month low and the yen hitting a one-week low. The euro and British pound have also shown signs of weakness, nearing their respective recent lows.

Currency markets have remained relatively stable as global bond yields have climbed. However, some market participants remain skeptical about whether the Fed will implement enough hikes to restore credibility after Fed Chair Kevin Warsh's appointment by President Trump, who aims to cut interest rates. The yen is expected to rally in the coming months due to expectations of a hawkish shift in Japanese interest rates and potential joint intervention between Japan and the US.

Additionally, Japanese investors are likely to repatriate capital, which may contribute to the yen's strength. The Bank of Japan is considered to have an 80% chance of raising rates on Friday, with traders pricing in two 25-basis-point hikes by the end of January. Market outlooks for the yen are cautiously optimistic but acknowledge the need for more evidence that the central bank can sustain the pace of tightening currently anticipated by the markets.