Dollar hits 20-year high as markets tend higher rates for longer

US Dollar bills are seen in this image taken on July 17, 2022. REUTERS/Dado Ruvic/Illustration

LONDON Aug 29 (Reuters) – The US dollar climbed to a 20-year high against other major currencies on Monday after Federal Reserve Governor Jerome Powell signaled that interest rates would be held higher for a longer period to curb rising inflation.

The dollar index, which measures the currency’s value against a basket of peers, has reached a new two-year high of 109.48.

The European Central Bank’s hawkish comments raised expectations for rate hikes in September, but this put European peers in distress.

The euro fell a quarter percent from $0.99415 in early European trade from 20-year lows, while the British pound fell to a 2-1/2 year low.

London markets were closed for a public holiday.

Powell said at the Jackson Hole central banking conference in Wyoming on Friday that the Fed will raise interest rates as needed to curb growth and keep them there “for a while” to lower inflation, which is more than triple the Fed’s rate. 2% goals

“Powell’s comments endorsed pricing a higher Fed funds rate for a longer period of time,” said Kenneth Broux, currency strategist at Societe Generale. “The assumption that the Fed will begin rate cuts in mid-2023 is premature.”

Money markets reacted in September by raising bets on a more aggressive rate hike by the Fed, and the probability of a 75 basis point increase is currently around 70%.

US Treasury bond yields supported the dollar as biennial yields hit a 15-year high of 3.49%.

The dollar rose 0.8% to 138.81 yen, its highest since July 21, while the offshore yuan fell to a fresh two-year low of 6.9321 per dollar.

The pound fell to a 2-1/2 year low of $1.1649 and was most recently down 0.5% to $1.1676.

“I think this week (the US dollar index) will move even higher towards 110 points, just as market participants will continue pricing in more aggressive tightening cycles by major central banks,” said Carol Kong, senior vice president of currency. Strategy and international economics at the Commonwealth Bank of Australia.

Speaking at the Jackson Hole Symposium, ECB board member Isabel Schnabel, French Central Bank governor Francois Villeroy de Galhau, and Latvian central bank Governor Martins Kazaks all advocated strong or important policy actions.

Even as the ECB’s potential for a major rate hike rises in September, the euro has struggled given an energy crisis that has increased recession risks across the bloc. Russian state energy giant Gazprom (GAZP.MM) It is expected to stop natural gas supplies to Europe from August. 31 – September 2. Read more

While risk aversion gripped world markets, the Australian and New Zealand dollars also succumbed to selling pressure.

The Australian dollar fell to $0.6838, its lowest level since July 19, while the kiwi hit its lowest level since mid-July at $0.61.

In cryptocurrencies, Bitcoin rallied somewhat but remained below the $20,000 level where it dropped over the weekend. Read more

Reporting by Dhara Ranasinghe; additional reporting by Rae Wee in Singapore; Edited by Christina Fincher

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