Dollar firm as markets brace for another big Fed rate hike

By Kevin Buckland

TOKYO (Reuters) – The dollar held steady below a two-decade high against major peers on Tuesday as investors braced for the Federal Reserve to continue its aggressive hike-rate campaign to curb overheated inflation.

The dollar index, which measures the greenback against its six counterparts, was little changed at 109.53, stable for the moment after falling from its peak of 110.79 earlier this month, a level not seen since June 2002 became.

US 2-year Treasury yields, which are highly sensitive to political expectations, rose as high as 3.970% overnight for the first time since November 2007. The 10-year government bond yield hit a high of 3.518%, a level not seen since April 2011.

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Investors have fully priced in another 75 basis point hike by the Federal Open Market Committee for Wednesday, setting 19% odds for an outsized full percentage point hike.

Those bets, while still high, are down from about 38% on Wednesday when they were shocked higher by a surprise acceleration in US consumer prices in August.

The dollar slipped 0.15% to 142.96 yen, continuing its week-long consolidation after attempting to hit 145 twice this month and bouncing back to 144.99 for the first time in 24 years on Sept. 7 . The dollar-yen currency pair typically follows the long-term yield spread between US and Japanese government bonds.

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The Bank of Japan makes policy decisions on Thursday and is widely expected to keep its ultra-loose stimulus stance unchanged. This includes fixing the 10-year yield close to zero.

“We need to see the FOMC,” said Tohru Sasaki, a strategist at JP Morgan in Tokyo.

“The dollar-yen will eventually break above 145, but the speed depends on how hawkish the Fed is and how interest rate differentials evolve.”

The euro was little changed at $1.0030 after slowly creeping higher over the past week, strengthening its position above parity. It fell to $0.9864 on September 6 for the first time in two decades.

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Sterling was unchanged at $1.14295, regaining footing after falling to a 37-year low of $1.13510 late last week.

The Bank of England will decide policy on Thursday. Investors are divided on whether a 50 basis point hike or a 75 basis point hike is imminent.

The risk-sensitive Australian dollar slipped 0.07% to $0.6722 and the New Zealand dollar fell 0.23% to $0.59435.

Bitcoin is down 0.48% to $19,445 after bouncing between a two-month low of $18,540 and a 3 1/2 week high of $22,781 over the past two weeks.

(Reporting by Kevin Buckland; Editing by Bradley Perrett)

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