In early European trading on Thursday, the U.S. dollar shot up, continuing its seemingly unstoppable rise on the back of expectations that the Federal Reserve will raise interest rates again and again after the latest red-hot inflation data came out.
At 3:15 AM ET (07:15 GMT), the Dollar Index, which compares the dollar to a basket of six other currencies, was up 0.6% to 108.430, just below this week’s peak of 108.560, which was the highest level in 20 years.
The gains came after the U.S. CPI for June was released on Wednesday. It went up 9.1% year-over-year, reaching a new four-decade high.
This made people think that the Fed could raise rates by a huge 100 basis points instead of the 75 basis points that had been expected at its meeting this month.
The President of the Fed Bank of Atlanta, Raphael Bostic, said that “everything is on the table” to fight price pressures, which made people think that a full percentage point was a real possibility.
Also, Fed Bank of Cleveland President Loretta Mester told Bloomberg that the central bank will have to do a lot more than the neutral level of interest rates to stop inflation from going up.
The EUR/USD fell by 0.4% to 1.0171. On Wednesday, for the first time since late 2002, it briefly went below parity.
The European Commission will release new economic projections later in the session. According to a draught of the projections seen by Bloomberg, the war in Ukraine, rising prices, and the risk of winter energy shortages will cause the European Commission to drastically cut its GDP projections for 2022 and 2023.
This puts the European Central Bank in a tough spot because a weaker currency could make inflation even higher than it already is. On the other hand, if the ECB tried to respond by raising interest rates quickly, it would put even more pressure on an economy that is already struggling because of high energy costs.
USD/JPY went up 1% to 138.72, which is a level not seen since September 1998. This was because the 2-year U.S. Treasury yield went up to 3.196%, which is just below a four-week high and much higher than the 10-year U.S. benchmark yield of 2.93406%.
The USD/CAD went up 0.4% to 1.3018, with the dollar gaining some ground after the Bank of Canada surprised the markets on Wednesday by raising interest rates by 1%. The central bank thought it was important to raise interest rates quickly to prevent high inflation from becoming entrenched.
The AUD/USD fell to 0.6759, the NZD/USD fell to 0.6115, and the USD/CNY rose by 0.3% to 6.7411.