Dollar zooms higher as markets brace for rates that are higher for longer

THE dollar shot higher on Monday (Aug 29), briefly scaling fresh 20-year highs against a basket of other currencies, as Federal Reserve chairman Jerome Powell signalled interest rates would be kept higher for longer to bring down uncomfortably high inflation.

The dollar index, which measures the currency’s value against a basket of peers, scaled a fresh 2-decade peak of 109.48 before pulling back slightly as the European session wore on.

It held around 0.5 per cent firmer against Japan’s yen, while China’s yuan breached the key threshold of 6.9 per dollar and Britain’s pound hit a fresh two-and-a-half year low.

The euro managed to claw back some ground and was last up 0.3 per cent at US$0.9993 as hawkish European Central Bank comments lifted expectations for a supersized September rate hike.

London markets were closed for a public holiday.

Powell told the Jackson Hole central banking conference in Wyoming on Friday that the Fed would raise rates as high as needed to restrict growth, and would keep them there “for some time” to bring down inflation that is running at more than 3 times the Fed’s 2 per cent goal.

“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.”

Money markets ramped up bets for a more aggressive Fed rate hike in September, with the chances of a 75-basis point hike now seen around 70 per cent. US Treasury yields shot up, with 2-year bond yields hitting a 15-year high at around 3.49 per cent, bolstering the greenback.

The dollar was up 0.54 per cent at 138.43 yen, having hit its highest since July 21.

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The onshore yuan finished domestic trade at 6.9210 per dollar, the weakest close since Aug 20, 2020, while the offshore yuan fell to a fresh 2-year low of 6.9325 per dollar.

Sterling fell to a two-and-a-half year low of US$1.1649 and was last down 0.25 per cent at US$1.17005.

Expectations for a supersized September rate hike in the euro area also rose. ECB board member Isabel Schnabel warned on Saturday that central banks risk losing public trust and must act forcefully to curb inflation, even if that drags their economies into a recession.

“Central banks have no interest in being anything but hawkish right now, given inflation, so they will hike rates aggressively,” said Nordea chief analyst Jan von Gerich.

Still, the euro was also seen held back by an energy crisis in the bloc that raises recession risks. Russian state energy giant Gazprom is expected to halt natural gas supplies to Europe from Aug 31 to Sep 2.

As risk-off sentiment gripped world markets, the Aussie dollar fell to US$0.6838, the lowest since Jul 19, while the kiwi dollar hit its lowest since mid-July at US$0.61.

In cryptocurrencies, Bitcoin recovered some ground but remained below the US$20,000 level it dipped below at the weekend. REUTERS