SINGAPORE, The dollar hovered at a near two-decade high against a basket currency on Wednesday after yields on U.S. Treasuries leapt ahead of an aggressive rate hike from the Federal Reserve.
The U.S. The U.S. dollar index, which measures the greenback in relation to a basket of currencies was 0.1% higher at 110.27. This is an overnight gain of 0.6% and remains not far from the 20-year high of 110.79.
The overnight yields on two-year U.S. Treasury Notes, which are a rough gauge for interest rate expectations, reached 3.992%. Yields on the benchmark 10-year Treasury rose by 3.604%, the most since 2011.
Related: Rising Dollar and Better Risk Attitudes Help Euro and Pound Sterling
Higher yields make Treasuries more attractive and give you the opportunity to purchase them with dollars.
The Federal Reserve will announce its policy settings at 1800 GMT. Markets have already priced in a 75-basis point (bp), rate hike, and a 19% chance for a 100-bp increase. Rates are expected to peak at 4.5% by March 2023.
Investors will also pay attention to the latest economic projections and dots plot estimates that show where Fed officials see interest rate heading.
Kristina Clifon, senior economist and currency strategist at Commonwealth Bank of Australia (OTCÂ CMWAY), stated that the next level the U.S. Dollar index would reach in the near-term is 112 points.
“If we get the Fed’s 75 basis points, it would require a very hawkish message in order to push the U.S. Dollar up to that level.”
Markets were surprised Tuesday by a 100-bp increase from Sweden’s Riksbank. However, it was not enough to help the currency. It was also weighed down by growth risks. The decision saw the currency drop to a 20 year low.
Sterling was last traded at $1.13705, hovering close to a 37-year low at $1.1351; the euro was 0.05% higher at $0.9964, prolonging by a tiny bit its overnight fall of 0.56%.
On Wednesday, the Australian and New Zealand dollar hit multi-year lows. The Aussie dropped to $0.6666, its lowest level since June 2020. Meanwhile, the Kiwi dropped to $0.5885, its low point since April 2020.
After Tuesday’s surprise slowdown in inflation, the Canadian dollar fell to 1.3376 per $1.
On Thursday, the Bank of England will announce its policy decisions. The markets are split on the size of the rate hike announced by the Bank of Japan. Policymakers in Japan will likely remain neutral.
Clifton was referring to Bank of Japan.
Related: The dollar reaches a 20-year high as markets brace for rising rates.
Data released Tuesday showed that Japan’s core consumer inflation rose to 2.8% in August. This was the fastest pace since almost eight years. It also exceeded the central bank’s target of 2% for the fifth consecutive month.
The yen has fallen 20% against the U.S. Dollar this year. It fell 0.1% to 143.83 dollars, just 0.1% below its 24-year low at 144.99.
