Dollar at fresh 20-year peak, stocks dump

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Dollar at fresh 20-year peak, stocks dump

The US dollar was at a fresh 20 year peak on Tuesday and just about everything else nursed losses as investors braced for Federal Reserve hikes and a possible recession.

After a hot U.S. inflation reading on Friday, markets have scrambled to price in steeper hikes. Futures are priced for a 93% chance that the Fed will hike its biggest hike in nearly three decades and raises rates 75 basis points.

As stocks and bonds were dumped, the dollar surged and hit one-month highs on the euro, Australian dollar, New Zealand dollar, Swiss franc and Canadian dollar overnight.

The US dollar index was at a two-decade peak of 105.29 and was just below that in early Asia trade. The euro was at its overnight low of $1.0405, while the Aussie was at $0.6943.

The pound was near a two-year low of $1.2109 overnight and held near there at $1.2145 on Tuesday.

The market was over invested in the idea that inflation has peaked, said Kit Juckes, Societete Generale strategist.

The Fed will only find out it has done too much, long after the event, so the policy challenge is that it has no idea how much monetary tightening is needed. The two-year Treasury yield has gone up about 60 basis points since Thursday's close to 3.3982% and traders are expecting to hike more than 200bps in September, and the futures have expectations of nearly 200bps of tightening by September.

The 10 year yield is below that, at 3.3770%, in a signal that investors fear that the tighter path will hurt growth and possibly cause a recession.

One possible outlier has been the yen, which hit its lowest since 1998 on Monday, but has since recovered as the dollar has gained elsewhere and the US yields hit new highs, which tends to drag money out of Japan and into dollars.

The yen was last at 134.00 per dollar after trading as low as 135.22 on Monday. It is down 14% on the dollar this year.

Brent Donnelly, of analytics firm Spectra Markets, said the failure to break through is telling, despite the huge surge in US 10 year yields.

The dollar yen is going to move to 130.55 with a stop at 135.55, looking for a move to 130.55. Japan's government and central bank issued a rare joint statement on Friday, expressing concern about the yen's sharp slide and some investors are wary of currency intervention or a wavering commitment to pinning bond yields.

The Japanese government bond yield briefly breached a 0.25% cap on Monday and there is already strong market pressure.