NEW YORK - The dollar consolidated gains on Friday and posted its biggest weekly rise in seven months as markets priced in a year ahead of aggressive hikes in U.S. interest rates.
Money markets priced in a 28.5-basis-point interest rate hike in March and as many as 119.5 basis points in cumulative increases by year's end as the dollar steadily rose in a week highlighted by a more hawkish tone coming out of a Federal Reserve meeting.
The dollar index rose a scant 0.04%. The index, which measures the dollar's value against other major currencies, rose about 1.7% for the week to mark its biggest weekly gains since June. It shot above 97 for the first time since July 2020.
"I look for some consolidation, but nothing to say that the dollar's up move is over," said Marc Chandler, chief market strategist at Bannockburn Global Forex.
U.S. labor costs increased strongly in the fourth quarter, but less than expected, the Labor Department said. The Employment Cost Index (ECI), the broadest measure of labor costs, rose 1.0% after increasing 1.3% in the prior quarter.
Economists polled by Reuters had forecast a 1.2% advance in the ECI, widely viewed as one of the better measures of labor market slack and a predictor of core inflation.
"The Employment Cost Index, which (Fed Chair Jerome) Powell has referred to specifically, was a bit softer than expected and has spurred some position adjusting ahead of the weekend," Chandler said.
U.S. Treasury yields eased, with 10-year yields falling to about 1.77% for the day, well below two-year highs of nearly 1.9% hit on Monday.
The two-year Treasury yield, which often moves in step with rate expectations, slid 2.8 basis points to 1.164%, but was still much higher for the week.
The euro nursed losses on Friday with the single currency little changed at $1.1143, a bit up from Thursday's 20-month low of $1.1131.
Major currencies drifted sideways in Asian trading before Lunar New Year holidays next week even though U.S. yields were marginally higher.
Data has been supportive of the dollar as the U.S. economy registered its best annual growth in nearly four decades.
The greenback is poised to gain further versus the euro and yen as the Fed raise rates but the European Central Bank and Bank of Japan likely stand pat. BOJ Governor Haruhiko Kuroda said Friday it was premature to raise the bank's rate targets.
A preliminary estimate next week of euro zone consumer prices in January is expected to lower the year-over-year rate toward 4.3% from 5.0%, allowing ECB President Christine Lagarde to keep the hawks at bay, Chandler said.
The yen rose 0.14% to 115.21 per dollar, while the Australian and New Zealand dollars languished, with the kiwi dipping slightly to a fresh 15-month low of $0.6570.
Sterling was pushed to a one-month low of $1.3360 on Thursday but has bounced back a bit as traders await the Bank of England's meeting next week. Rates markets have priced a 90% chance of a hike.
(Reporting by Saikat Chatterjee; Additional reporting by Tom Westbrook in Sydney; Editing by Mark Heinrich and Jonathan Oatis) ((email@example.com; +44-20-7542-1713; Reuters Messaging: firstname.lastname@example.org))