Dollar strength as markets prepare for another big Fed rate hike

US dollar and euro banknotes are shown in this illustration taken on July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

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TOKYO (Reuters) – The dollar held steady near a two-decade high against its major peers on Tuesday as investors prepared for another interest rate hike by the Federal Reserve as it struggled to rein in inflation.

The dollar index, which measures the greenback against six peers, rose 0.09% to 109.64, currently stable after pulling back from a high of 110.79 earlier this month, a level not seen since June 2002.

To provide additional support, the US 2-year Treasury yield, which is considered highly sensitive to policy expectations, rose to 3.970% overnight for the first time since November 2007. The 10-year Treasury yield reached a high of 3.518%, a level not seen since April 2011.

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Investors priced another 75 basis points in full by the FOMC on Wednesday, and put odds of 19% for a very large increase by a full percentage.

While those bets are still high, they are down from about 38% on Wednesday, when they were shocked by a sudden rise in US consumer prices for August.

The dollar rose 0.07% to 143.29 yen, continuing its week-long consolidation after two attempts at 145 this month that reached 144.99 on September 7 for the first time in 24 years. The USD/JPY currency pair tends to track the long-term yield differential between US and Japanese government bonds.

The Bank of Japan decided policy on Thursday, and is widely expected to keep its ultra-easy stimulus settings unchanged – including holding the 10-year yield near zero – to support a fragile economic recovery.

This is despite data on Tuesday showing core consumer inflation accelerating to an eight-year high of 2.8% in August, topping the central bank’s 2% target for the fifth consecutive month. Read more

“The CPI was very strong, but the Bank of Japan is likely to keep policy unchanged, so the outlook for Fed policy is more important” for currency markets, said Toru Sasaki, a strategist at JPMorgan in Tokyo.

“Dollar-yen will eventually break above 145, but the speed depends on how tight the Fed is, and developments in the interest rate differential.”

The Euro was little changed at $1.00235 after slowly rallied over the past week and consolidated its position above parity. It fell to $0.9864 on September 6 for the first time in two decades.

The British pound was slightly lower at $1.14245, finding its feet after dropping to a 37-year low of $1.13510 at the end of last week.

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

“With expectations split, the potential for volatility in the British pound is unsurprisingly high,” Chris Weston, head of market research at Pepperstone, wrote in a client note.

“Looking at the heavy downtrend in sterling, one could easily assume that the speculative part of the market is already very short for sterling. This should moderate the downside at 50bps but we see a clear move higher if we see an upside of 75 basis points.

Meanwhile, minutes from this month’s RBA meeting showed policy makers see a case to slow the pace of hikes as interest rates approach normal levels. Read more

The Australian dollar fell 0.11 percent to $0.67195. The New Zealand dollar, its Antipodean counterpart, fell 0.24% to $0.59425.

Leading cryptocurrency Bitcoin fell 0.59% to $19,422, after swinging between a two-month low of $18,540 and a 3 1/2-week high of $22,781 over the past two weeks.

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Kevin Buckland reports. Editing by Bradley Perrett and Kim Coogill

Our Standards: Thomson Reuters Trust Principles.

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