Against a basket of currencies, the US dollar soared to a 20-year high on Monday after Federal Reserve Chairman Jerome Powell suggested that interest rates would be maintained at a higher level for longer in order to rein in soaring inflation.
The dollar index reached a new two-decade high of 109.44 in the Asia trade as the strength of the dollar forced other major currencies to new lows and placed pressure on its counterparts in emerging economies.
The offshore yuan dropped to a fresh two-year low of 6.93 per dollar, while the dollar hit 138.88 against the Japanese yen, its highest level since July 21.
While the euro fell 0.49 percent to $0.99, sterling also dropped to a 2-and-a-half-year low of $1.1656 and was last down 0.61 percent to $1.16.
The actions extended the dollar’s gains from Friday, when Powell warned that there would be “some pain” for individuals and businesses because it would take time for the Fed to rein in inflation.
Carol Kong, senior associate for currency strategy and international economics at Commonwealth Bank of Australia, stated that Powell made it apparent that there is no dovish swing as some market participants had anticipated.
“I believe that for this week, the main central banks’ more aggressive tightening cycles will be priced in by market players, and the (US dollar index) will climb much higher toward 110 points.”
In response to Powell’s remarks, US Treasury yields increased on Monday. The 10-year yield was around 3.12 percent, while the two-year yield increased to 3.49 percent, the highest level since late 2007.
The probability of a 75 basis point rate increase at the September Fed meeting is now estimated by the markets to be roughly 76.5 percent.
According to Charu Chanana, market strategist at Saxo Capital Markets, “the discussion on the amount of rate hikes may start to take a backseat from here, with focus shifting to peak rates and how long those would be held.”
Despite the potential for a hike that big at the European Central Bank’s (ECB) September policy meeting, the euro has struggled with investors more focused on an energy crisis in the bloc.
After some policymakers expressed interest in such a significant change, markets are now pricing in the possibility that the ECB could increase rates by 75 basis points next month.
However, the Russian state energy company Gazprom is expected to halt natural gas supplies to Europe this week, from August 31 to September 2. According to Saxo’s Chanana, this week’s attention will be more on the Nord Stream maintenance and how quickly the pipeline resumes operating.
The risk-averse Australian and New Zealand dollars also had trouble maintaining gains on Monday. The Aussie was down 0.7pc to $0.68, the lowest since July 19, while the kiwi hit a new one-month low of $0.61. In cryptocurrencies, Bitcoin remained below the $20,000 level as investor sentiment dipped, and was last down 3.89pc to $19,843.02.
