Fed rate hike forecasts push dollar to 5-week high

THE US dollar index hit a 5-week high and posted its biggest weekly gain since April 2020 on Friday (Aug 19) as investors adjusted for the likelihood that the Federal Reserve will keep hiking rates to battle inflation. The US central bank needs to keep raising borrowing costs to tame decades-high inflation, a string of its officials said on Thursday, even as they debated how fast and how high to lift them.

“They still have their work cut out for them and I don’t think the market was really positioned that way after the July FOMC,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto, referring to the Fed’s Federal Open Market Committee meeting. “It’s really all about getting inflation back to target.”

The dollar index rose 0.61 per cent to 108.13, its highest since Jul 15, while the euro dropped 0.54 per cent to US$1.0033, its lowest since that date. The greenback gained 0.73 per cent to 136.87 against the Japanese yen, the strongest since Jul 27. Sterling tumbled 1.03 per cent to US$1.1813 and had its biggest weekly drop against the dollar since September 2020.

The Fed is seen as having more room to hike rates than central banks of other large, more fragile economies. “For the USD to weaken meaningfully, the Fed has to get more concerned about growth than inflation, and we are not there yet,” Bank of America analyst Michalis Rousakis said in a report. “Meanwhile, we expect the (European Central Bank) to stop hiking next year on concerns around growth and/or spreads. EUR is also exposed to the much worsened terms of trade and the slowdown in China,” Rousakis said. The euro was also dented on Friday after Gazprom said the Nord Stream 1 pipeline, which supplies gas from Russia to Europe under the Baltic Sea, will be shut down from Aug 31 to Sept 2 for maintenance.

Fed funds futures traders are pricing in a 55 per cent expectation that the Fed will hike rates by 50 basis points in September and a 45 per cent probability of a 75 basis points increase. Fed chair Jerome Powell will update the market on his views at the annual Jackson Hole symposium on Aug 25-27.

China’s yuan slipped to its lowest since September 2020 at 6.8199 per dollar in onshore trading after the central bank set a much-weakened midpoint guidance, with traders expecting further downside. REUTERS

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL