Dollar pulls further away from 20-year highs

Dollar pulls further away from 20-year highs

The dollar index pulled further away from 20 year highs on Wednesday, having already priced the US Federal Reserve to raise interest rates by a half-point and by some 250 basis points by the end of the day.

Currency markets have settled in to wait for the Fed's 1800 GMT announcement and Chairman Jerome Powell's news conference, which has suffered wild gyrations in recent weeks, with the dollar soaring to 20 year highs against a basket of currencies.

Money markets are betting that the Fed will raise rates as high as 3.6% by the end of 2023 to tame inflation at 40 year highs. The Fed is seen delivering a 50 bps move on Wednesday, with two more half-point hikes priced for the next two meetings after it kicked off its hiking cycle in March.

It may announce when it will start reducing its $9 trillion balance sheet.

The dollar index was lifted by 5% last month, to around 103.93. It has slipped 0.3% off those levels and was slightly lower on the day at 103.39, slipped by 00830 GMT.

A major correction in the dollar would happen only if the Fed pushes back against market pricing and until they do that, there is a degree of freedom for markets to reprice the terminal rate to 4%, according to Francesco Pesole, ING Bank strategist.

Where do you put your money if you let go of dollar positions? Pesole said that the economic slowdown in China and the Russia-Ukraine war in Europe are the main reasons for the effect of the Russian-Ukraine war on Europe.

The euro was two-decade lows last week, as the dollar strength weighed on other currencies, pushing it to two-decade lows around $1.0469. It was at $1.0512 on Wednesday.

Gergely Majoros, a member of Carmignac's investment committee, said the fundamentals, the interest rate difference, the growth outlook, and the risk-off mood tend to favor the dollar.

There are a lot of factors that point to a stronger dollar and a weaker euro. We have increased dollar positioning in our global portfolio. Some note markets' expectations of the future U.S. inflation-protected securities TIPS have eased with 5 year breakevens around 3.2%, compared to April highs of 3.6%.

If the Fed will aggressively frontload the tightening cycle and the back end of the Treasury curve comes off a bit, that will be the indication that markets are starting to price the Fed ahead of the curve on inflation, he added.