The Business Times

US dollar firm ahead of Fed, Swedish krona not helped by rate rise

Published Tue, Sep 20, 2022 · 08:15 PM

THE US dollar remained strong near a 2-decade high versus major peers on Tuesday (Sep 20) as investors held firm in expectation of another aggressive rate hike by the Federal Reserve (Fed), the centrepiece of a week packed with central bank meetings.

Sweden’s central bank set the tone for the week by raising rates by a full percentage point on Tuesday. The rate hike by the Riksbank was larger than analysts had expected, causing the Swedish krona to briefly spike against the euro and US dollar.

It failed to hold on to that strength however, and the euro extended recent gains, climbing to a fresh 6 month top of 10.846 kronas. The US dollar also climbed 0.36 per cent to 10.82 kronas.

“In a way this was an attempt by the Riksbank to lift the krona, but it failed, and it’s not surprising,” said Francesco Pesole, currency strategist at ING.

He said the relationship between European currencies and central bank policies had been breaking down as markets increasingly traded on the energy and growth outlook for Europe instead.

The main central bank event this week, however, is the Fed, which begins its 2-day rate-setting meeting later on Tuesday. Markets have fully priced another 75 basis point increase, with around a 15 per cent chance of a super-sized full percentage point increase, according to CME’s Fedwatch tool.

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The US dollar index, which measures the greenback against 6 counterparts, was 0.2 per cent stronger 109.82, heading back to the 110.79 it hit earlier this month, a level not seen since June 2002.

Providing additional support, the 2-year US Treasury yield, which is extremely sensitive to policy expectations, rose as high as 3.992 per cent in early London trade, its highest since November 2007.

Pesole said markets would pay some attention to US housing data due later in the day, though moves would likely be a little less pronounced with markets in a holding pattern ahead of the outcome of the Fed’s meeting.

The euro slipped a whisker on the US dollar to US$1.0013. It dropped as low as US$0.9864 on Sep 6 for the first time in 2 decades, while beaten-down sterling was a touch firmer at US$1.1446.

The Bank of England will decide policy on Thursday, and investors are split over whether a 50 or 75 basis point hike is on the way.

The Bank of Japan (BOJ) also meets this week but is widely expected to keep its ultra-easy stimulus settings unchanged – including pinning the 10-year yield near zero – to support a fragile economic recovery.

The yen has taken a kicking due to this policy and the US dollar was last up 0.27 per cent on the Japanese currency at 143.59, continuing a week-long consolidation after climbing as high as 144.99 on Sep 7 for the first time in 24 years.

The US dollar-yen currency pair tends to track the long-term yield spread between US and Japanese government bonds, and so was little affected by data that showed inflation was hot, at least by Japanese terms.

“CPI was very strong, but the BOJ will likely keep policy unchanged, so expectations about Fed policy are more important” for currency markets, said Tohru Sasaki, a strategist at JP Morgan in Tokyo.

“US dollar-yen will eventually break above 145, but the speed depends on how hawkish the Fed is, and developments in interest rate differentials.” REUTERS

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