Dollar, euro trade sideways after ECB pushback

The dollar strengthened and the euro weakened in sideways trade on Tuesday, a day after European Central Bank President Christine Lagarde tapped down expectations of aggressive interest rate hikes that have spooked bond markets.

A more hawkish tone from both the ECB and the Federal Reserve last week caught markets off guard and sent yields soaring on euro zone and US debt in anticipation rates could rise faster and higher than previously expected.

Currencies broadly traded little changed as the market awaits US consumer price data on Thursday. Economists polled by Reuters forecast the year-over-year CPI in January was 7.3%.

The dollar index rose 0.2%, with the euro down 0.21% to $1.1418.

Expectations of a rate rise in tandem have caused some topsy-turvy market response not fully fleshed out in the price action, said John Kicklighter, chief strategist at DailyFX.

“It inevitably has to snap back to some sense of normalcy,” Kicklighter said, suggesting the notion of up to seven Fed rate hikes this year is too aggressive and unlikely to happen.

“Eventually the markets will have to back off of their extreme expectations and that’s probably what’s going to settle some of this drive and volatility,” he said.

The yield on 10-year US Treasuries topped 1.97% on Tuesday, the highest since November 2019 and a jump from about 1.73% just two weeks ago.