Dollar bides time ahead of expected US Federal Reserve hike

[LONDON] The US dollar held steady near multi-week highs on Wednesday (Sep 16), ahead of a Federal Reserve decision that traders expect will mark the first in a series of possible US interest-rate hikes.

The dollar has advanced this week, along with yields and energy prices, gaining the most against the yen and the New Zealand dollar. The yen touched a one-week low of 155.49 per dollar during the Asian session.

Market participants are betting heavily that Fed policymakers will lift their benchmark rate by a quarter of a percentage point, to a 3.75 to 4 per cent range, and signal further tightening ahead.

Kirstine Kundby-Nielsen, senior FX analyst at Danske Bank, said: “Even though a hike is close to being fully priced, we could see some dollar strength (if they raise interest rates).”

At US$1.1536, the euro was not far from Monday’s one-month low of US$1.1523. The pound was at US$1.3470, after British inflation accelerated to a five-month high in August, a day before the Bank of England is expected to leave rates steady.

The dollar index, which measures the currency against major peers, was little changed at 99.67.

Currency markets have been relatively subdued in recent weeks, while global bond yields have climbed as sovereign bonds moved in tandem, leaving relative differences between countries’ yields little changed.

But the dollar gained traction in the last few sessions on expectations that even if US President Donald Trump’s Fed chair pick, Kevin Warsh, was inclined to cut interest rates, he would first need to raise them a few times to demonstrate that the Fed is committed to curbing inflation fuelled by the Iran war and the resulting surge in energy prices.

“If you end up getting a hike and Warsh doesn’t vote for it, then you could get a setback in the dollar,” said Kundby-Nielsen.

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“There would be a focus on credibility.”

The yen has been in the midst of its most promising rally in months, supported by a hawkish shift in expectations for Japanese interest rates, joint intervention by Japan and the US, as well as speculation that Japanese investors are repatriating capital.

Traders see an 80 per cent chance that the Bank of Japan will hike rates on Friday, LSEG data showed, and have priced in two 25-basis-point hikes by the end of January.

In a research note, Julius Baer economist David A Meier said: “The yen’s path will continue to depend heavily on interest rate differentials.

“We recently revised our USD/JPY forecasts to 155, reflecting some scepticism that the central bank can ultimately satisfy the pace of tightening currently priced in by markets.”

A long rally in China’s renminbi has lost momentum at around 6.71 to the dollar, but the currency is holding its gains despite a widening gap between low Chinese yields and rates elsewhere. REUTERS