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Title: Dollar Soars Against the Yen; Rate Differentials Widen

Sep 01, 2022 03:14AM ET

By: AnalysisWatch

The US dollar rose in early European trading on Thursday on rising expectations of further aggressive interest rate hikes by the Federal Reserve, with the Japanese yen particularly hard hit.

At 03:15 GMT, the dollar index, which tracks the greenback against a basket of six other currencies, was trading 0.4% higher at 109.040, not far from the 20-year high of 109.48 recorded earlier in the week

Expectations of a significant US interest rate hike at the Federal Reserve's meeting in late September are rising thanks to solid economic data and continued hawkish comments from Fed officials.

Wednesday's ADP employment report showed that the pace of U.S. private sector hiring slowed in August, but the addition of 132,000 people was still healthy. Earlier, the JOLTS job openings report pointed to continued strength in the labor market, which puts Friday's official employment report firmly in focus.

Expectations for another significant interest rate hike rose after Fed Chairman Jerome Powell said last week that reducing price pressures toward their 2% target is the Fed's "primary objective."

Policymakers have continued to pursue the theme, with Cleveland Fed President Loretta Mester saying on Wednesday that the central bank needs to raise its key interest rate above 4% by early next year from its current target range of 2.25%–2.5% and leave it there for some time to help cool inflation.

This has led to a rise in US Treasury yields, with the yield on two-year Treasuries hitting a high of 3.51%, the highest since late 2007.

In contrast, Japanese officials have made it clear that their interest rates are not going anywhere anytime soon. The divergence in rates between Japan and the US led to USD/JPY rising 0.3% to 139.38, just below the 24-year high of 139.69 seen at the start of Asian trading.

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