The Business Times

Euro holds above 2-decade low before ECB rate hike

Published Thu, Sep 8, 2022 · 08:03 PM

The euro was hovering above Tuesday’s (Sep 6) 2-decade low on Thursday as investors awaited a second straight rate hike from the European Central Bank (ECB) and comments from the head of the Federal Reserve for insight on the path for global monetary tightening.

The ECB is expected to raise rates by 75 basis points (bps), taking its deposit rate above 0 for the first time since 2012, but the option of a smaller 50 basis point hike hasn’t been ruled out.

“We expect the ECB to only do 50 basis points today, instead of the consensus view of 75,” said Chris Turner, head of markets at ING. “If that’s the case, we think euro-dollar probably corrects back down to about US$0.99.”

By 1107 GMT, the euro was trading flat at US$1.0007, holding above its lowest level since late 2002 of US$0.9864 as Europe’s energy crisis keeps the single currency under pressure and the US dollar reigns as the Fed reiterates its commitment to bring inflation down to target.

Fed chair Jerome Powell is scheduled to participate in a discussion at 1310 GMT – overlapping with ECB chief Lagarde’s post-decision press conference – with Fed officials soon due to enter into a blackout period prior to the central bank’s Sep 20-21 meeting.

Recent Fed rhetoric has continued to be hawkish overall.

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Boston Fed president Susan Collins said on Wednesday that bringing inflation back down to 2 per cent is the Fed’s “Job One,” while vice-chair Lael Brainard said tight monetary policy will continue “for as long as it takes to get inflation down”.

Money markets lay 79 per cent odds that the Fed will hike by another 75 bps at this month’s meeting, which would increase the fed funds rate to 3-3.25 per cent.

The US dollar index, which measures the currency against 6 major counterparts, edged 0.1 per cent lower to 109.53, after hitting a peak at 110.79 on Wednesday, a level not seen since June 2002.

Sterling was up 0.1 per cent at US$1.15455, edging away from the previous day’s 37-year low of US$1.1407, as new British Prime Minister Liz Truss set out the government’s plans to tackle soaring energy bills.

Japan’s yen showed some resilience on Thursday, trading little changed at 143.77 per US dollar, having reached a 24-year low of 144.99 in the previous session.

The yen has been a particular victim of recent US dollar strength, partly due to its sensitivity to rising long-term US yields as hawkish Fed bets ramped up and the Bank of Japan remains the holdout dovish central bank.

Japan is ready to take action in the currency market and will not rule out any options to address “clearly excessive volatility” seen in recent yen moves, the country’s top currency diplomat said after a meeting between the Bank of Japan (BOJ), Ministry of Finance and Financial Services Agency.

“Ongoing depreciation pressure on the yen has raised the probability of a change in policy (from the Bank of Japan) later this year,” Goldman Sachs analysts said in a research note.

“If the BOJ drops YCC (yield curve control), rate differentials versus the US should stop widening, and the rise in USD/JPY should pause or reverse.”

Meanwhile, the Australian dollar fell 0.4 per cent to US$0.67415, earlier tumbling as low as YS$0.6713, after Reserve Bank of Australia governor Philip Lowe said in a speech “the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises”. Reuters

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