Rampant dollar has room to run as Fed gears up for more hikes

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(Bloomberg) — The rising dollar is wreaking havoc on foreign exchange markets as traders brace for the Federal Reserve to continue raising interest rates aggressively.

Over the past week, the pound fell past $1.14 for the first time since 1985, the Australian dollar hit a new two-year low against the greenback and the Chinese yuan fell to its lowest point since 2020, hitting $7 per dollar. passed.

Officials in Japan, meanwhile, indicated they could prepare to intervene in the market to prevent further weakening of the yen, which is hovering around its 24-year low. The euro fell back below par, despite the European Central Bank’s jumbo rate hike last week.

Traders are betting that the Fed will have to act decisively after a higher-than-expected inflation reading this week. They have priced in a third consecutive 75 basis points for Wednesday’s meeting and see a slim chance of a larger 100 basis point move, the biggest increase since 1984.

“The dollar call is basically a US inflation call,” Bank of America (NYSE:) strategists including Claudio Piron wrote in a note to customers. “Assuming the Fed remains committed to fighting inflation, but also avoids a hard landing, we would expect the dollar to start weakening only when US inflation is on a clear downward path.”

Inflation surprise puts the responsibility on Fed to brake even harder

The Fed’s aggressive stance and the dollar’s role as a haven stand out against a backdrop of policy easing in China and Japan, and lingering fears of growth in Europe due to an ongoing energy crisis. Commodity currencies have also been hit as traders anticipate the risk of the global central bank tightening consumer demand.

“In such an environment, risk sentiment struggles to recover and this is just another factor slowing any dollar correction,” ING Bank NV strategist Francesco Pesole wrote in a note to customers. “We see the dollar remain on solid ground until Wednesday’s FOMC announcement.”

While this is not their base case, strategists at Goldman Sachs & Co (NYSE:) LLC, including Dominic Wilson, have calculated that a more aggressive stance by the Fed, which pushes the unemployment rate to 5%, could lead to a further 4% gain in the dollar. could mean on a trade-weighted basis.

“Policymakers have made it clear that they want to see inflation on a sustained downward path, which I believe means core inflation will decline for at least several months,” said Joachim Fels, director of Pacific Investment Management Co. path could remain elusive for quite some time, especially in the US.”

©2022 Bloomberg LP



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