The dollar hit a 20-year high as markets crave higher rates for longer

U.S. dollar bills are seen in this image taken on July 17, 2022. REUTERS/Dado Ruvic/Illustration

LONDON, Aug 29 (Reuters) – The U.S. dollar rose to a 20-year high against other major currencies on Monday after Federal Reserve Chairman Jerome Powell signaled interest rates would be kept higher for longer to tame rising inflation.

The dollar index, which measures the value of the currency against a basket of peers, rose to 109.48.

That put European peers on edge, even as hawkish comments from the European Central Bank raised expectations for a September rate hike.

The euro fell a quarter of a percent to $0.99415 in early European trade, a 20-year low, while the British pound fell to a 2-1/2-year low.

London markets are closed for the holiday.

At the Jackson Hole central bank conference in Wyoming on Friday, Powell said the Fed would raise interest rates as necessary to limit growth and keep them there “for a while” to bring down inflation, which has more than tripled. 2% target.

“Powell’s comments confirmed pricing for a higher Fed funds rate for longer,” said Kenneth Broux, currency strategist at Societe Generale. “It is premature to assume that the Fed will start cutting interest rates in mid-2023.”

Money markets have responded by boosting bets for a more aggressive Fed rate hike in September, and the chance of a 75 bps hike now looks around 70%.

US Treasury yields rose, with the two-year bond yield hitting a 15-year high around 3.49%, boosting the dollar.

The dollar rose 0.8% to 138.81 yen, its highest since July 21, while the offshore yuan fell to a new two-year low of 6.9321 per dollar.

Sterling hit a 2-1/2-year low of $1.1649 and was last down 0.5% at $1.1676.

“I think the (US dollar index) will move higher towards 110 this week, as market participants continue to price in more aggressive tightening cycles by major central banks,” said Carol Kong, chief currency strategist at Commonwealth Bank of Australia. international economy.

Speaking at the Jackson Hole Symposium, ECB board member Isabelle Schnabel, French Central Bank Governor François Villeroy de Galhau and Latvian Central Bank Governor Martins Kazaks argued for strong or significant policy action.

While the potential for a major ECB rate hike in September has risen, the euro is struggling amid an energy crisis that has raised recession risks in the bloc. Russia’s state energy giant Gazprom (GAZP.MM) It is expected to stop supplying natural gas to Europe from August. 2 from September 31. read more

As risk-on sentiment gripped global markets, the Australian and New Zealand dollars also succumbed to selling pressure.

The Australian dollar fell to $0.6838, its lowest since July 19, while the kiwi hit $0.61, its lowest since mid-July.

In cryptocurrencies, Bitcoin fell slightly, but remained below the $20,000 level it hit over the weekend. read more

Reporting by Dhara Ranasinghe; Additional reporting by Rae Wee in Singapore; Edited by Christina Fincher

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