After Federal Reserve Chair Jerome Powell said interest rates would be kept higher for longer to bring down surging inflation on Monday, the US dollar rose to a 20-year high against other major currencies.
A gauge of the dollar’s strength versus a group of other currencies, the dollar index, hit a new 20-year high of 109.48.
That put it at a disadvantage relative to its European counterparts, who were already struggling despite hawkish comments from the European Central Bank that raised hopes for a rate hike in September that was ultimately postponed.
In early European trade, the euro was down a quarter of a percent to $0.99415, approaching 20-year lows, while the pound fell to a 2-and-a-half-year low against the dollar.
A national holiday caused the London stock exchange to be closed.
On Friday, Powell told attendees at the Jackson Hole central banking conference in Wyoming that interest rates would be raised as high as necessary to curb growth and would remain at those levels “for some time” in order to bring down inflation, which is currently running at more than three times the Fed’s 2% goal.
According to Societe Generale currency strategist Kenneth Broux, “Powell’s comments encouraged the pricing of a higher Fed funds rate for a longer duration.” It is too soon to assume that the Fed will begin lowering interest rates in the middle of 2023.
As a result, the money markets are now pricing in a 70% possibility of a 75 basis point move from the Federal Reserve in September.
Two-year bond yields on US Treasuries soared to roughly 3.49 percent, a 15-year high, boosting the US dollar.
On the other hand, the offshore yuan dropped to a new two-year low of 6.9321 per dollar, while the dollar rose 0.8% to 138.81 yen, its best level since July 21.
The value of the pound dropped to a new low of $1.1649, its lowest level in over two and a half years, and has since recovered by 0.5% to $1.1676.
According to Commonwealth Bank of Australia senior associate for currency strategy and international economics Carol Kong, “I think for this week, the (US dollar index) is going to track even higher towards 110 points just as market participants continue to price in more aggressive tightening cycles by the major central banks.”
At the Jackson Hole Symposium, Isabel Schnabel, the board member of the European Central Bank, urged for strong or substantial policy action, as did Martins Kazaks, the governor of the central bank of Latvia.
The euro has been weak because of the energy crisis in the EU, which has increased the likelihood of a recession even as expectations for a large ECB rate hike in September climb. The European Union should expect a shutdown in natural gas deliveries from Russia’s national energy behemoth Gazprom (GAZP.MM) from August 31 to September 2.
With a widespread fear of losing money, investors dumped Australian and New Zealand dollars.
Down to its lowest level since July 19 (at $0.6838), the Australian dollar followed the trend of the New Zealand dollar (at $0.61), which also reached its lowest level since the middle of July.
Bitcoin, the largest cryptocurrency, made some gains but is still trading below the $20,000 barrier it fell below over the weekend.