After Federal Reserve Chair Jerome Powell said interest rates would be kept higher for longer to tame surging inflation, the U.S. dollar rose to a 20-year high against other major currencies on Monday.
A new two-decade peak of 109.48 was reached by the dollar index, which analyzes the value of the dollar to a basket of peers.
This put its European counterparts in a mire even though the European Central Bank’s hawkish remarks raised hopes for a massive rate hike in September.
In early European trade, the euro fell a quarter of a per cent to $0.99415 and was approaching recent 20-year lows, while the British pound fell to a 2-1/2 year low.
To reduce inflation, which is currently running at more than three times the Fed’s 2% target, Powell said on Friday at the Jackson Hole central banking conference in Wyoming that the Fed would raise rates as high as necessary to stifle growth and maintain them there “for some time.”
“Powell’s comments endorsed the pricing of a higher Fed funds rate for a longer period,” said Kenneth Broux, a currency strategist at Societe Generale. “The assumption that the Fed would start cutting rates in mid-2023 is premature.”
In response, betting on a more aggressive Fed rate hike in September increased, with the likelihood of a 75 basis point move now estimated to be at 70%.
The two-year bond yield reached a 15-year high of roughly 3.49%, increasing U.S. Treasury yields and supporting the dollar. – Agencies