US dollar hits two-decade high as Fed announces more hikes

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  • Euro at two-decade low
  • Fed hikes rates by 75 bps as expected; flags more mountaineering

NEW YORK, Sep 21 (Reuters) – The dollar hit a two-decade high on Wednesday after the Federal Reserve raised interest rates by 75 basis points and signaled further increases in its upcoming meetings.

Dollar gains were limited as the Fed’s decision was widely expected. Still, as US rates remain higher for a longer period, the trend remains pro-dollar for some time, analysts said.

New projections from the Fed showed it raising its policy rate to 4.4% by the end of the year to curb uncomfortably high inflation, before peaking at 4.6% in 2023. Rate cuts are not expected until 2024. Read more

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Fed Chairman Jerome Powell said in his press briefing that there is no painless way to reduce inflation, reiterating that it now wants to act aggressively and maintain it. He said the Fed’s actions are likely to result in slower growth and higher unemployment. read more

The dollar index rose to a 20-year high of 111.63 after the Fed rate hike, and was last up 0.7% at 110.97.

“We expect the US dollar to remain stable in the short term, but we are reluctant to factor in additional, sustained US dollar gains from here on and we think it would be complacent to rule out hands-down risks here,” said Sean Osborne , said chief FX strategist at Scotiabank in Toronto.

He said that the value of the dollar has become very high. Since the start of the year, the dollar index has risen nearly 16%, the biggest annual percentage gain since at least 1972, when Refinitiv launched the data series.

Osborne also said that while higher US rate expectations have already been priced in dollars, the peak fed funds rate, or US central bank policy rate, advanced more than 100 bps since August.

The euro, the biggest component in the dollar index, fell to a 20-year low, reaching $0.9810. Europe’s single currency was last turned down 1.2% at $0.9852.

Against the yen, the dollar posted modest gains against other currencies, reaching a high of 144.695 yen. The greenback was last trading at 143.98 yen, up 0.2% on the day. Traders were wary of pushing the dollar forward, given the threat of Japanese interference to boost the yen.

“They (the Fed) have a brief window to act aggressively, and they are eager to use that,” said Jan Szillagi, co-founder and CEO of Toggle AI, an investment research firm.

“There’s another reason to push growth. Public and market tolerance for tighter monetary policy is far higher with the unemployment rate below 4%, a historic low.”

Sterling fell to a new 37-year low of $1.1237 and last traded at $1.1272, down nearly 1%.

Earlier in the session, the dollar made gains after Russian President Vladimir Putin decided to mobilize more troops for the conflict in Ukraine.

Putin called on 300,000 reservists to fight in Ukraine on Wednesday and said Moscow would respond with the might of all its vast arsenal if the West called “nuclear blackmail” over the conflict there. read more

European currencies bore the brunt of a sell-off in foreign exchange markets as Putin’s comments raised concerns about the economic outlook for the region, already hit by Russia’s pressure on gas supplies to Europe.

Osborne noted that heightened geopolitical risks underscore the dollar as a safe haven and alternatives are scarce in the developed world.

“We think the time is coming for a correction in the US dollar, but dollar bears will have to be patient a bit longer,” he said.

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Currency Bid Price at 3:46 pm (1946 GMT)

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Reporting by Gertrude Chavez-Dreyfus; Additional reporting by Dhara Ranasinghe in London; Editing by Kirsten Donovan and Deepa Babington

Our Standards: Thomson Reuters Trust Principals.

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