US Dollar hovers near two-decade peak as investors gear up for Fed

US Dollar Fed

The US dollar hovered near a two-decade peak against a basket of currencies on Wednesday, after yields on US Treasuries leaped ahead of another aggressive rate hike expected from the Federal Reserve (Fed).

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

Yields on the two-year U.S. Treasury notes, a rough gauge of interest rate expectations, hit 3.992% overnight, the highest since 2007, while yields on the benchmark 10-year Treasury rose to 3.604%, the highest since 2011.

Higher yields increase the attraction of owning Treasuries and the dollars with which to buy them.

Federal Reserve hikes key interest rate by 0.75% points

At 1800 GMT the Federal Reserve will announce policy settings, and markets have fully priced in a 75 basis point (bp) rate increase, with a 19% chance of a 100 bp increase and a forecast for rates to peak around 4.5% by March 2023.

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

Sweden’s Riksbank surprised markets on Tuesday with a bigger-than-expected 100 bp increase, but it was little help to the currency – weighed by growth risks – which fell to a 20-year low after the decision.

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, extending by a smidge its 0.56% fall overnight.

The Australian and New Zealand dollars meanwhile hit multi-year lows on Wednesday. The Aussie hit a trough 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 at 1.3376 per dollar after official data on Tuesday showed a surprise slowdown in inflation.

Bank of Canada increases interest rate by 100 basis points

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 stand pat. – Agencies

Bank of England raises interest rate by 0.5pc points to tame inflation

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