Dollar rises as investors gear up for Fed rate hike

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The US dollar index, which measures the greenback against a basket of currencies, rose 0.1% to 110.27.

SINGAPORE:

The dollar hovered near a two-decade high against a basket of currencies on Wednesday after US Treasury yields jumped ahead of another aggressive rate hike expected from the Federal Reserve.

The US dollar index, which measures the greenback against a basket of currencies, rose 0.1% to 110.27, extending an overnight gain of 0.6%, and was not far below its 20-year high of 110.79 which was reached this month.

Yields on the two-year US Treasury bill, a rough gauge of interest rate expectations, reached 3.992% overnight, the highest level since 2007, while the 10-year benchmark Treasury yield rose to 3.604%, the highest since 2011.

Higher yields increase the attractiveness of owning government bonds and the dollars with which they can be bought.

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At 1800 GMT, the Federal Reserve will announce policy settings, and markets have fully priced in a 75 basis points (bp) rate hike, with a 19% chance of a 100 bp gain and a prediction that interest rates will peak around March 2023. will reach 4.5% .

Investors’ focus will also be on the updated economic projections and dot plot estimates showing where Fed officials see interest rates moving.

“The next level we see the (US dollar index) reach in the near term would be 112 points,” said Kristina Clifton, senior economist and senior currency strategist at Commonwealth Bank of Australia.

“If we get the 75 basis points from the Fed, it would take a rather aggressive message to push the US dollar to that level.”

Sweden’s Riksbank surprised markets on Tuesday with a larger-than-expected 100bp gain, but it didn’t help the currency – weighted by growth risks – which plunged to a 20-year low after the decision.

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Sterling last traded at $1.13705, languishing near a 37-year low of $1.1351, while the euro was 0.05% lower at $0.9964, marking the $0.99 drop. 56% extended with a cut overnight.

The Australian and New Zealand dollars hit multi-year lows on Wednesday. The Aussie hit a low of $0.6666, its lowest since June 2020, while the kiwi fell to $0.5885, its lowest since April 2020.

The Canadian dollar similarly fell to a two-year low of 1.3376 per dollar after official data on Tuesday showed a surprising slowdown in inflation.

The Bank of England and the Bank of Japan will announce policy decisions on Thursday, with markets split on the magnitude of a rate hike by the former, while policymakers in Japan are expected to hold their own.

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“Inflation has gone up, but I think that’s largely because of food and energy, so I think they want inflation to broaden a little bit before they change their policy stance,” Clifton said, referring to the Bank of Japan.

Japanese core consumer inflation accelerated to 2.8% in August, hitting its highest annual pace in nearly eight years and surpassing the central bank’s 2% target for the fifth straight month, data released Tuesday showed.

The yen, which has fallen about 20% against the US dollar this year, fell about 0.1% to 143.83 per dollar, not far from the 24-year low of 144.99.

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