Title: Dollar hits 20-year high as markets hunker down for higher rates for longer

Aug 29, 2022 03:45AM ET

By: AnalysisWatch

The U.S. dollar hit a 20-year high against other major currencies on Monday after Federal Reserve Chairman Jerome Powell signaled that interest rates would be kept higher for longer to curb rising inflation.

The dollar index, which measures a currency's value against a basket of equivalent instruments, hit a new two-year high of 109.48 points.

That left its European counterparts on hold, although hawkish comments from the European Central Bank have boosted expectations of an oversized rate hike in September.

In early European trading, the euro fell a quarter of a percent to $0.99415, nearing recent 20-year lows, and the British pound sank to a 2-1/2-year low.

London's markets were closed for a public holiday.

Money markets reacted by raising bets on a more aggressive Fed rate hike in September, with the odds of a 75 basis point increase now estimated at around 70%.

U.S. Treasury yields rose, with the two-year note yield hitting a 15-year high of around 3.49%, which supported the greenback.

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

Sterling dropped to a two-and-a-half-year low of $1.1649 and was last down 0.5 percent at $1.1676.

Even as the potential for a big ECB rate hike in September increases, the euro is struggling given the bloc's energy crisis, which is raising recession risks. Russian state-owned energy giant Gazprom is expected to halt natural gas supplies to Europe from August 31 to September 2.

And as risk sentiment swept global markets, the Australian and New Zealand dollars also succumbed to selling pressure.

The Australian dollar fell to US$0.68388, the lowest since July 19, and the kiwi hit its lowest since mid-July at US$0.61.