Dollar strength as markets wait for Fed, Swedish crown rises briefly as interest rates rise

US dollar and euro banknotes are shown in this illustration taken on July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

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TOKYO/LONDON (Reuters) – The dollar remained strong near a two-decade high against its major peers on Tuesday as investors held firm in expecting the Federal Reserve to raise interest rates again to curb inflation.

The Riksbank set the tone for a week filled with central bank meetings by raising interest rates by a full percentage point, a larger increase than analysts had expected, causing the Swedish krona to briefly rise against the euro and dollar. Read more

The crown was changed slightly for both 10.764 per dollar and 10.8 per euro after it was briefly fixed as high as 10.7025 per euro.

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However, the central bank’s main event this week is the Federal Reserve, which begins its two-day rate-setting meeting later Tuesday. Markets fully priced another 75 basis points increase, with about a 15% chance of a significant full percentage increase, according to CME’s Fedwatch tool.

The dollar index, which measures the greenback against six peers, settled at 109.69, currently stable after retreating from a high of 110.79 earlier this month, a level not seen since June 2002.

ING Analysts who expect the dollar to have a “hawkish rally” of 75 basis points said, “there appears to be no reason for the Fed to tone down the hawks that appeared at the recent Jackson Hole symposium, presumably to maintain the ‘hawkish rally’.” The dollar is near its highest levels this year. Quiet session ahead of today’s FOMC meeting.”

To provide additional support, the two-year US Treasury yield, which is considered highly sensitive to policy expectations, rose to 3.973% in early London trading, its highest level since November 2007.

The euro managed to pressure again above parity with the dollar, and it was at $1.0016. It fell to $0.9864 on September 6 for the first time in two decades.

The British pound rose by $1.1458, although it is still close to a 37-year low of $1.13510 hit at the end of last week.

The Bank of England will decide policy on Thursday, and investors are divided over whether a 50 or 75 basis point hike is on the way. Read more

The Bank of Japan also meets this week but is widely expected to keep its ultra-easy stimulus setup unchanged – including holding the 10-year yield near zero – to support the fragile economic recovery.

The yen took a boost due to this policy and the dollar recently rose 0.2% against the Japanese currency at 143.49, continuing its week-long consolidation after rising to 144.99 on September 7 for the first time in 24 years.

USDJPY tends to track the long-term yield differential between US and Japanese government bonds, and thus was little affected by data released on Tuesday showing that Japan’s core consumer inflation accelerated to 2.8% in August, posting its fastest annual pace in Almost eight years. Read more

“The CPI was very strong, but the Bank of Japan is likely to keep policy unchanged, so the outlook for Fed policy is more important” for currency markets, said Toru Sasaki, a strategist at JPMorgan in Tokyo.

“Dollar-yen will eventually break above 145, but the speed depends on how tight the Fed is, and developments in the interest rate differential.”

The Australian dollar fell 0.37 percent to $0.6702.

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(Kevin Buckland Report) and (Alun John). Editing by Bradley Perrett, Kim Coogle and Susan Fenton

Our Standards: Thomson Reuters Trust Principles.

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