U.S. dollar soars to two-decade high as Fed flags more large hikes

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  • Euro slips to two-decade lows
  • Fed hikes rates 75 basis points as expected; indicates further hikes

NEW YORK, Sept 21 (Reuters) – The dollar soared to a fresh two-decade high on Wednesday after the US Federal Reserve hiked interest rates by another 75 basis points and announced more big hikes at its forthcoming meetings.

Dollar gains were limited as the Fed’s decision was widely anticipated. However, with US interest rates set to be higher for an extended period, the trend will remain supportive for the dollar for some time, analysts say.

The Fed’s new projections showed that interest rates will rise to 4.4% by the end of the year before peaking at 4.6% in 2023 to curb uncomfortably high inflation. Rate cuts are not expected until 2024. Continue reading

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Fed Chair Jerome Powell said in his press briefing that there is no painless way to bring inflation down, reiterating that she wants to act aggressively now and stick with it. He added that the Fed’s actions are likely to result in slower growth and higher unemployment. Continue reading

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The dollar index hit a fresh 20-year high of 111.63 after the Fed hiked interest rates and was last up 0.7% to 110.97.

“We expect the US dollar to remain firm in the short-term, but we remain reluctant to discount additional, sustained US dollar gains from here and think it would be complacent to dismiss downside risk here said Shaun Osborne, chief foreign exchange strategist at Scotiabank in Toronto.

He said the dollar is significantly overvalued. Since the beginning of the year, the dollar index is up nearly 16%, the largest annual percentage gain since at least 1972, when Refinitiv began the data series.

Osborne also said that higher US interest rate expectations are already priced into the dollar, with the prime federal funds rate, or Federal Reserve policy rate, up more than 100 basis points since August.

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The euro, the largest component in the dollar index, fell to a 20-year low, hitting $0.9810. Europe’s single currency last changed hands at $0.9852, down 1.2%.

Against the yen, the dollar saw modest gains versus other currencies, rising as high as 144,695 yen. The greenback last traded at 143.98 yen, up 0.2% on the day. Traders remained cautious about pushing the dollar higher amid the threat of Japanese intervention to strengthen the yen.

“They (the Fed) have a short window of opportunity to act aggressively, and they seem eager to take advantage of it,” said Jan Szilagyi, co-founder and CEO of Toggle AI, an investment research firm.

“There is another reason to bring forward rate hikes. Public and market tolerance for tighter monetary policy is far higher as the unemployment rate is below 4%, a historic low.”

Sterling fell to a fresh 37-year low of $1.1237 and last traded at $1.1272, down almost 1%.

Earlier in the session, the dollar saw gains following a decision by Russian President Vladimir Putin to mobilize more troops into the conflict in Ukraine.

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Calling on 300,000 reservists to fight in Ukraine on Wednesday, Putin said Moscow would respond with the might of its entire arsenal if the West continued what he called its “nuclear blackmail” over the conflict there. Continue reading

European currencies bore the brunt of selling in the currency markets as Putin’s comments heightened concerns about the economic outlook for a region already badly hit by Russia’s choke on gas supplies to Europe.

Osborne noted that heightened geopolitical risks have underpinned the dollar as a safe haven and alternatives in developed markets are scarce.

“We believe the time for a US dollar correction is coming, but the dollar bears will have to wait a little longer,” he said.

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Currency bid prices at 15:46 (1946 GMT)

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Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Dhara Ranasinghe in London; Edited by Kirsten Donovan and Deepa Babington

Our standards: The Thomson Reuters Trust Principles.

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