Dollar Hits 20-Year High as Markets Seek Higher Rates Longer

Dollar Hits 20-Year High as Markets Seek Higher Rates Longer
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US dollar bills are seen in this illustration taken on July 17, 2022. REUTERS/Dado Ruvic/Illustration

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LONDON Aug 29 (Reuters) – The US dollar rose to a 20-year high against other major currencies on Monday after Federal Reserve Chairman Jerome Powell signaled interest rates would stay higher for longer to reduce runaway inflation.

The dollar index, which measures the value of the currency against a basket of pairs, climbed to a new two-decade high of 109.48.

That left European peers depressed even as hawkish comments from the European Central Bank raised expectations for a large rate hike in September.

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The euro fell a quarter of a percentage point in early European trading to $0.99415, within sight of 20-year lows, while sterling sank to a 2-1/2-year low.

London markets were closed for a bank holiday.

Powell said Friday at the central banking conference in Jackson Hole in Wyoming that the Fed would raise rates as much as needed to restrain growth and keep them there “for some time” to reduce inflation, which is tripling the rate of the Fed. target of 2%.

“Powell’s comments supported the price of a higher fed funds rate for a longer period,” said Kenneth Broux, currency strategist at Societe Generale. “The assumption that the Fed would start cutting rates in mid-2023 is premature.”

Money markets responded by raising bets on a more aggressive rate hike from the Fed in September, with the chances of a 75 basis point hike now looking around 70%.

US Treasury yields soared, with two-year bond yields hitting a 15-year high of around 3.49%, bolstering the dollar.

The dollar rose 0.8% to 138.81 yen, after hitting its highest level since July 21, while the offshore yuan fell to a new two-year low of 6.9321 per dollar.

Sterling fell to a two-and-a-half-year low of $1.1649 and was down 0.5% at $1.1676.

“I think for this week the (US dollar index) is going to rally further towards 110 just as market participants continue to price in more aggressive tightening cycles by major central banks,” said Carol Kong, senior foreign exchange associate strategy and international economics at the Commonwealth Bank of Australia.

Speaking at the Jackson Hole Symposium, ECB board member Isabel Schnabel, French central bank chief Francois Villeroy de Galhau, and Latvian central bank governor Martins Kazaks called for strong or significant political action.

Even as the potential for a big ECB rate hike in September mounts, the euro has struggled as an energy crisis in the bloc raises recession risks. Russian state energy giant Gazprom (GAZP.MM) It is expected to stop the supply of natural gas to Europe from August 1. Sept 31 two. read more

And as risk-off sentiment gripped global markets, the Australian and New Zealand dollars also succumbed to selling pressure.

The Australian dollar fell to $0.6838, the lowest level since July 19, while the kiwi hit its lowest level since mid-July at $0.61.

In cryptocurrencies, Bitcoin regained some ground but remained below the $20,000 level that it fell below over the weekend. read more

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Information from Dhara Ranasinghe; additional reporting from Rae Wee in Singapore; edited by Christina Fincher

Our standards: The Thomson Reuters Trust Principles.

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