Beijing time on Thursday (September 22) in early Asian trading, the US dollar index rose slightly and is currently trading around 114.44. The U.S. dollar surged to a fresh 20-year high on Wednesday after the Federal Reserve raised interest rates by another 75 basis points and signaled further massive hikes at its upcoming meeting. However, the dollar’s gains were limited as the Fed’s decision was widely expected. Still, the trend remains positive for the dollar for a while, as U.S. rates are set to move higher for longer, analysts said.
The Fed’s latest forecasts show its policy rate will rise to 4.4% by the end of the year before peaking at 4.6% in 2023 to curb uncomfortably high inflation, with no rate cut expected until 2024.
Fed Chair Jerome Powell said at a news conference that lowering inflation is impossible without pain, reiterating his desire to act aggressively now and stick with it. He added that the Fed’s actions could lead to slower growth and higher unemployment.
The U.S. dollar index hit a 20-year high of 111.64 on Wednesday before closing up 1.06 percent at 111.37.
Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said:We expect the dollar to remain strong in the near term, but we’re still reluctant to consider additional, sustained dollar gains on top of that, and we think it’s complacent to dismiss downside risks now. “
The dollar has become significantly overvalued, he said. The dollar index has surged nearly 16% since the start of the year, its biggest annual percentage gain since at least 1972, when Refinitiv started the data series.
Osborne also said that U.S. rate hike expectations have been priced in by the dollar, with the federal funds rate, the Fed’s policy rate peak, rising by more than 100 basis points since August.
The euro closed down 1.32 percent against the dollar on Wednesday at 0.9836.HSBC economists expect EUR/USD to fall below new year lows in coming weeks。
Russian President Vladimir Putin called on 300,000 reservists to fight in Ukraine on Wednesday and said Moscow would respond with what he called “nuclear blackmail” in the Ukrainian conflict with its vast arsenal.
European currencies bore the brunt of the sell-off in foreign exchange markets, as Putin’s comments heightened concerns about the region’s economic outlook. Europe has already been hit by Russia’s squeeze on European gas supplies.
HSBC economists pointed out that although the euro against the dollar found support at parity levels, but due to the strengthening of the dollar and a series of challenges facing the euro zone economy, the euro against the dollar will fall below the new low of the year in the next few weeks. On the positive side, the risks posed by the upcoming Italian general election on September 25 do not appear to be significant, while the market is noting that the tone of the Italian election has been dovish without a strong element of euro skepticism. If political developments in Italy pose downside risks to the euro, those risks are also unlikely to flare up this month.
Compared with other currencies, the dollar rose slightly against the yen on Wednesday, reaching as high as 144.70, and finally closed up 0.25% at 144.07. Traders remained cautious about pushing the dollar higher given the threat of Japan intervening to boost the yen.
Prudence.
The Bank of Japan will announce its interest rate decision on September 22. IG Group predicts that it is expected to remain unchanged, focusing on whether there are foreign exchange intervention measures.
IG Group said that the Bank of Japan is not expected to change its loose monetary policy stance on Thursday. Looking ahead, the probability of the Bank of Japan raising interest rates by 10 basis points in October is only 11%, and the probability in December is only 21%. Japan’s recent headline inflation rate of 3% indicates that the BOJ is under increased pressure to change its easing policy, and if Japan’s inflation rate rises further above 3% in the coming months, the pressure on the BOJ’s policy shift will further increase, Market participants will therefore be watching closely for any change in attitude from the Bank of Japan policymakers.
The IG Group noted that, in addition,Whether the Bank of Japan will intervene in currency markets will be the focus of this week’s meeting, Bank of Japan policy makers are likely to continue to highlight concerns about a weaker yen at the meeting. Various events this year have shown thatWhile the BOJ is likely to push the yen higher, the lack of any concrete follow-through could ultimately keep the USD/JPY uptrend intact.
GBP/USD fell to a fresh 37-year low of $1.1234 on Wednesday and was last down 0.98% at $1.1268.
Adam Dent, a strategist at Santander, said: “Investors’ views on the UK’s prospects have clearly deteriorated, so the bar for a further sharp deterioration is high. But the inexperienced new government faces huge challenges and is prone to mistakes, exacerbating investors concerns.”
Some respondents pointed to the woes of the global economy and said the UK was not the only country facing challenges. ING economist James Knightley said: “We are seeing fragile investor confidence in many regions and asset markets. That said, the UK does appear to be weaker than most.”
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Thursday’s key data and outlook
Big things to watch on Thursday:The Bank of Japan announced its interest rate decision, Bank of Japan Governor Haruhiko Kuroda held a monetary policy press conference, and the Bank of England announced its interest rate decision and meeting minutes.
Summary of Institutional Views
1. Rabobank: Putin’s speech will support dollar on safe-haven demand
① Rabobank said that Russian Putin announced a partial mobilization, indicating that “the Russian-Ukrainian conflict may be on the verge of an escalation of war.” That would put pressure on the euro and Eastern European currencies, and would also cement the dollar’s appeal as a safe-haven currency. Before these announcements, the euro exchange rate had not yet reflected the economic risks posed by the energy crisis;
②In our view, this news increases the downside potential of EUR/USD.EUR/USD is expected to trade around the 0.95 level from winter to next spring
2. Bank of America: Dollar could be stronger for longer
Bank of America said the meeting is expected to have less impact on the U.S. dollar given that markets are currently pricing in a 75 basis point rate hike from the Federal Reserve this week, but it expects the U.S. dollar to remain strong for longer and possibly even stronger
3. Sony Financial Group: If the US and Japan rise above 150, Japan may intervene, but it is less likely
“If dollar-yen rises above 150 very quickly, intervention may be possible, but in reality, it’s extremely unlikely given the ineffectiveness of intervention,” said Hiroshi Watanabe, senior economist at Sony Financial Group. “
4. ING: Fed will remain hawkish until December 2023 policy shift
① Given the Fed’s aggressive stance and the possibility that inflation will barely change over the next month while job creation remains firm, ING expects the Fed to raise rates by 75 basis points in November;
② By the December meeting, only a 50bps rate hike may be needed as leading indicators show signs of easing price pressures, but weak economic activity data may be enough to persuade the Fed to act more cautiously. That means a fifth rate hike of 75 basis points cannot be ruled out. Despite the Fed’s hawkish stance, the market initially expects a rate cut of nearly 50 basis points in 2023;
③ ING Bank believes that the Fed may turn to easing policy significantly in the second half of 2023, and said that in the past 50 years, the average time from the last rate hike in a cycle to the Fed’s first rate cut is only 6 months.