Dollar hits 20-year high as markets seek higher rates for longer

US dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

LONDON, Aug 29 (Reuters) – The U.S. dollar hit a 20-year high against other major currencies on Monday after Federal Reserve Chairman Jerome Powell announced interest rates would be kept lower. long enough to bring down runaway inflation.

The dollar index, which measures the value of currency against a basket of peers, hit a new high in two decades at 109.48.

That left its European peers in the doldrums even as hawkish comments from the European Central Bank boosted expectations of an oversized rate hike in September.

The euro was down a quarter percent in early European trading at $0.99415, ahead of recent 20-year lows, while the British pound fell to a 2.5-year low .

London markets were closed for a public holiday.

Powell told the central bank conference in Jackson Hole, Wyoming, on Friday that the Fed would raise rates as high as needed to restrain growth and hold them “for a while” to bring inflation down, which is over three times that of the Fed. Target 2%.

“Powell’s comments endorsed pricing a higher fed funds rate for a longer period,” said Kenneth Broux, currency strategist at Societe Generale. “The assumption that the Fed would start cutting rates in mid-2023 is premature.”

Money markets reacted by raising bets for a more aggressive Fed rate hike in September, with the odds of a 75bp hike now around 70%.

US Treasury yields soared, with two-year bond yields hitting a 15-year high of around 3.49%, supporting the greenback.

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

The British pound fell to a 2.5-year low at $1.1649 and was last down 0.5% at $1.1676.

“I think for this week, the (US dollar index) will climb even higher towards 110 points, just as market participants continue to anticipate more aggressive tightening cycles from major central banks,” said Carol Kong, senior currency partner. strategy and international economics at the Commonwealth Bank of Australia.

Speaking at the Jackson Hole symposium, ECB board member Isabel Schnabel, French central bank chief executive Francois Villeroy de Galhau and Latvian central bank governor Martins Kazaks all pleaded for forceful or meaningful political action.

Even as the potential for a big ECB rate hike in September increases, the euro has struggled given an energy crisis in the bloc that is raising recession risks. The Russian energy giant Gazprom (GAZP.MM) is expected to interrupt natural gas supplies to Europe from August 31 to September 2. Read more

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

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

In cryptocurrencies, Bitcoin recovered some ground but remained below the $20,000 level it fell below over the weekend. Read more

Reporting by Dhara Ranasinghe; additional reporting by Rae Wee in Singapore; edited by Christina Fincher

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