On Wednesday, the dollar index fell further from 20-year highs, with the US Federal Reserve expected to hike interest rates by a half-point later in the day and by 250 points.
After experiencing wild gyrations in recent weeks, currency markets have settled down to await the Fed’s announcement and Chairman Jerome Powell’s press conference. The dollar has soared to 20-year highs versus a basket of currencies. Money markets expect the Fed to raise rates to as high as 3.6 percent by the end of 2023 to contain inflation, which is near 40-year highs. The Fed is expected to deliver a 50-basis point raise on Wednesday, after kicking off its hike cycle in March, with two more half-point hikes factored in for the following two sessions.
It might also reveal when it plans to begin decreasing its $9 trillion balance sheet. Last month, these wagers pushed the dollar index up 5% to approximately 103.93. It has now fallen 0.3 percent from those highs, and as of 00830 GMT, it was trading at 103.39, down marginally on the day.
How Are the Other Currencies Competing?
The dollar’s surge has dragged on other currencies, sending the euro to two-decade lows at $1.0469 last week. On Wednesday, it was trading at $1.0512. “The fundamentals, the interest rate differential, the economic prognosis, and the risk-off mindset all point to the dollar,” said Gergely Majoros, a member of Carmignac’s investment committee. “Several factors point to a stronger dollar and a weaker euro…in our global portfolio, we have enhanced our dollar strategy.” Market expectations of future U.S. inflation, derived from Treasury inflation-protected securities (TIPS), have fallen, with 5-year breakevens at 3.2 percent, compared to April highs of 3.6 percent. ING’s Pesole, on the other hand, disregarded the measures.
Market expectations of future U.S. inflation, derived from Treasury inflation-protected securities (TIPS), have fallen, with 5-year breakevens at 3.2 percent, compared to April highs of 3.6 percent.