US dollar rebounds as traders wrestle with US rate view

THE US dollar rebounded across the board on Thursday (Jul 28) as investors digested the implications of the Federal Reserve's (Fed) latest comments on the future path of interest rates while the euro slumped broadly as the region's economic outlook darkened.

Traders interpreted the Fed's decision to drop its commitment to guide markets on the future rate trajectory after a widely expected 75 bps hike as a sign that policymakers may soften their stance, pushing the US dollar lower.

But the greenback rebounded broadly in midday London trading as traders cut some of those bets on worries that other economies, notably Europe and China, will continue to struggle in the short term, benefiting US dollar-based assets.

"Problems for other currencies just keep on growing, most notably in Europe, where rising fears over gas and energy shortages are continuing to weigh on the euro and threatening the ability of the ECB to tighten policy as much as it might otherwise wish to do so," said Stuart Cole, chief macro strategist at Equiti Capital in London.

Versus the US dollar, the single currency fell 0.7 per cent to US$1.0129 while it fell more than 1.3 per cent versus the yen .

Berenberg economists estimate the European Union might have to pay about 430 billion euros (S$602.4 billion) or as much as 3 per cent of the region's 2021 GDP in natural gas bills. JP Morgan expects the economy to slip into a mild recession by early next year.

However, the US dollar's rise wasn't broad-based.

The yen rose versus the greenback by nearly 1 per cent 135.10 yen, its highest level since early July. The Japanese unit was the primary recipient of the widening interest rate differential trade between the United States and its global peers.

"Speculation is now building that the US dollar may have peaked if the pace of tightening slows in September after consecutive 75bp moves in June and July," said Kenneth Broux, an FX strategist at Societe Generale in London.

Markets have already ramped up bets of a softening in future US interest rate hikes, with futures now assigning a 65 per cent probability of a 50 bps hike in September from 50 per cent on Wednesday, according to CME. Bets of a 75 bps hike have been pared back to 35 per cent from 41 per cent.

The US dollar index, which measures the greenback against 6 counterparts including the yen, perked 0.5 per cent higher to 106.84 after dropping 0.59 per cent overnight, nearly erasing most of its overnight losses.

A gauge of currency market volatility settled at its highest level since Jul 8 above 10 per cent. REUTERS