As markets get ready for a huge increase in interest rates from the Fed, the dollar continues to be the most important currency.
Hong Kong (Reuters) – On Wednesday, the value of the dollar remained relatively close to its overnight 20-year high ahead of the outcome of a policy meeting held by the Federal Reserve. In order to stop inflation from getting out of hand, policymakers are expected to raise interest rates by a huge 75 basis points at the meeting.
The dollar index, which measures the dollar’s value in relation to six other currencies, was last seen trading at 105.35 after reaching a high of 105.65 the previous day (its highest point since late 2002).
The pound sterling exchange rate was at $1.2010 after falling to a 15-month low against the dollar the previous day at $1.1934. This decline was not aided by the potential of a fresh vote on the independence of Scotland. The euro was trading at $1.0428, which was only slightly higher than its overnight one-month low. [GBP/]
According to the CME’s Fedwatch tool, market pricing implies a 95 percent possibility of a 75 basis point rate hike at the Fed’s meeting, which concludes later on Wednesday. This is an increase from only 3.9 percent a week ago, albeit a slight decrease from almost 99 percent earlier in the day.
The sharp increase in expectations came after media reports, first by the Wall Street Journal, that a larger rate of increase was on the cards after data released last week showed that the U.S. consumer price index surged 8.6 percent in the 12 months leading up to May, which was the largest year-on-year increase in four decades. The data showed that the increase was the largest year-on-year increase in four decades.
In the past few months, the U.S. dollar has already been gaining ground thanks to the Federal Reserve raising rates ahead of most other major central banks. In recent weeks, however, as investors seek safe havens out of fear of the impact that rapidly tightening financial conditions will have on the economy, the dollar has been given another leg up.
But because a big increase in interest rates is already expected, it’s possible that the dollar won’t be able to rise much more after the Fed’s decision.
In a note published in the morning, CBA analysts stated that “given present aggressive market pricing, there is a chance that the (Federal Open Market Committee) is regarded ‘not hawkish enough,‘” which would have the effect of bringing down U.S. interest rates and the USD somewhat after the meeting.
“In our opinion, in order to meaningfully push the USD up after the FOMC meeting, it will take more than a 75bp hike tomorrow, or a nod to a 100bp hike for the FOMC’s meeting in July,”
In comparison to historical lows, interest rates in the United States are higher. Yields in Japan have been a drag on the value of the yen, which fell to a new 24-year low of 135.58 per dollar in early trade before recovering to 135.05.
The anticipation of higher interest rates has also been detrimental to risk-friendly investments like technology stocks. Meanwhile, on the currency markets, the Australian dollar, which is frequently used as a proxy for investors’ willingness to take risks, is currently trading at $0.6898 after inching up 0.43 percent on Wednesday from the previous day’s one-month low.
The Australian dollar has fallen by 7.9 percent so far this quarter, and if this trend continues, it will have its worst quarter since the first three months of 2020, when the COVID-19 pandemic began.
At the time of this writing, the New Zealand dollar was trading at $0.6221, which was only a hair’s breadth above its overnight low of $0.6197.
Bitcoin, which is another type of asset that is not too sensitive to risk, dropped by 4% to $21,200. It went as low as $20,800 on Tuesday, which was the lowest level in 18 months. The big cryptocurrency lender Celsius Network stopped withdrawals earlier this week, which also hurt the price.
