Dollar holds below two-decade peak as markets consider the Fed’s direction

Ketan Mahajan
Ketan Mahajan

Updated · Jul 20, 2022

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Markets reduced the probability of a Federal Reserve rate increase by 1% this month. The U.S. Dollar remained slightly higher than its one-week low against major peers. Data showed that U.S. inflation continued its upward trend in June, despite being at an all-time high of four decades, so bets on supersized easing increased last Wednesday. Federal Reserve officials quickly dismissed such claims. Data released Friday showed that consumer inflation expectations had fallen to their lowest point in one year.

Futures traders who were leaning toward a full percent hike in interest rates for futures contracts related to the Federal Reserve’s short-term Federal funds policy rate have altered their bets substantially in favor of a 0.75 percent point increase at the meeting. When last checked, the odds were 81 percent.

The dollar index, which measures the dollar’s value against six other currencies, was unchanged at 110.47. This was a significant drop from the high of 109.29 in September 2002. However, it was still higher than Monday’s low at 106.88.

The dollar index’s most heavily weighted currency, the euro, dropped 0.8% to $1.01355 but gained 0.6% overnight for significant gains. The euro zone’s possible energy shortfall prompted concerns about the single currency falling below $0.9952 for the first time since December 2002.
Traders are gnawing at their nails ahead of Thursday when gas will resume flowing through the Nord Stream conduit between Russia and Germany after a scheduled maintenance shutdown.
Gazprom, Russia, imposed force majeure in a July 14 letter from Reuters Monday. It aimed to halt gas deliveries to Europe to at most one important customer.

Despite uncertainties, the European Central Bank is ready to raise interest rates on Thursday. Although a shift of 25 basis points has been anticipated, traders speculate on a half-point increase.
Concerning the dollar’s status as a haven currency, Carol Kong, an analyst at Commonwealth Bank of Australia, stated in a client letter that the “balance of risks” favors a weaker EUR. However, the path of least resistance to the USD is to keep trending higher.

The yen was trading close to its 24-year low in other markets ahead of Thursday’s Bank of Japan policy announcement. Recently, the central bank repeatedly stated that it would maintain its ultra-easy policy settings.
The dollar was unchanged at 138.135 yen from Thursday’s peak of 140.38 yen which was not seen since September 1998.
The risk-averse Australian Dollar fell 0.06% to $0.6809 after rising to a one-week high of $0.6853 Monday, from $0.66825, its lowest level in over two years.

The dollar barely changed at 138.135 Japanese yen, just shy of its high of 139.38 on Thursday, which was the highest since September 1998.
The risk-sensitive Australian currency fell 0.06% to $0.6809 on Monday after reaching a one-week high of $0.6853. It had fallen as low as $0.66825 Thursday, its lowest point over two years.

Ketan Mahajan

Ketan Mahajan