Dollar holds below 20-year high ahead of Fed hike

Dollar holds below 20-year high ahead of Fed hike

The dollar held just below a 20 year high against a basket of currencies on Monday before an expected Federal Reserve hike this week, with traders focused on the potential for the US central bank to adopt a more hawkish tone than many expect.

The Fed has taken an increasingly aggressive approach to monetary policy as it tackles inflation that is soaring at its fastest pace in 40 years. It is expected to hike rates by 50 basis points and announce plans to reduce its $9 trillion balance sheet when it ends its two-day meeting on Wednesday.

Some investors are watching for a 75 basis point hike, or a faster pace of balance sheet reduction than currently expected, even though the chances are seen as low.

A lot of traders are anticipating that the Fed is not going to back down from this hawkish stance and that's why the dollar is likely to hold onto its gains heading into the meeting, said Edward Moya, senior analyst with OANDA in New York.

The comments by Fed Chairman Jerome Powell at the end of the meeting will be scrutinized for any indications that the Fed will continue to hike rates to fight rising price pressures even if the economy falls.

US factory activity grew at its slowest pace in more than a year and a half in April, despite the rise in workers quitting their jobs, and manufacturers are becoming more anxious about supply.

The dollar was the highest since December 2002 against a basket of currencies, reached 103.93 on Thursday, the highest since December 2002.

The euro was at $1.0493 after dropping to $1.0470 on Thursday, the lowest since Jan. 2017.

The single currency hurt after data showed euro zone manufacturing output growth stalled last month as factories struggled to source raw materials, while demand took a knock from steep price increases.

As a result of the sanctions imposed on Russia after its invasion of Ukraine, it has suffered from concerns about inflation, growth and energy insecurity.

Global growth concerns have also boosted demand for the dollar as China shuts down cities in an attempt to stem the spread of COVID - 19. Authorities in Shanghai reported 58 new cases outside areas under strict lockdown on Monday, while Beijing pressed on with testing millions of people.

In April, China's factory activity contracted at a steeper pace as the lockdowns halted industrial production and disrupted supply chains, raising concerns of a slowdown in the second quarter that will affect global growth.

The dollar was up 0.6% versus the Chinese yuan in offshore markets, reaching 6.6820, just below the 6.6940 level on Friday, which was the highest since Nov. 2020.

The Japanese yen held just above 20 year lows against the dollar on Thursday when the Bank of Japan strengthened its commitment to keep interest rates ultra-low by vowing to buy unlimited bonds daily to defend its yield target.

The Japanese currency was the lowest since April 2002, at 130.14, after reaching 131.24 on Thursday.