Dollar hits 20-year high as markets look for higher rates longer

US dollar bills are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

LONDON, Aug 29 (Reuters) – The U.S. dollar climbed to a 20-year high against other major currencies on Monday after Federal Reserve Chairman Jerome Powell signaled interest rates would be kept higher for longer to curb soaring inflation.

The dollar index, which measures the currency’s value against a basket of peers, scaled a new two-decade high of 109.48.

It left its European peers in the doldrums, although hawkish comments from the European Central Bank raised expectations of a big rate hike in September.

The euro fell a quarter of a percent in early European trade to $0.99415, within sight of 20-year lows, while the British pound sank to a 2-1/2-year low.

The London markets were closed for a public holiday.

Powell told the Jackson Hole central bank conference in Wyoming on Friday that the Fed will raise interest rates as high as necessary to limit growth, and will keep them there “for a while” to bring down inflation that is more than three times the Fed’s. 2% target.

“Powell’s comments supported the pricing of a higher Fed funds rate for an extended period,” said Kenneth Broux, a currency strategist at Societe Generale. “The assumption that the Fed will start cutting interest rates in mid-2023 is premature.”

Money markets responded by increasing their bets for a more aggressive Fed rate hike in September, with the odds of a 75 bps increase now around 70%.

US Treasury yields shot up, with two-year bond yields hitting a 15-year high of around 3.49%, boosting the dollar.

The dollar rose 0.8% to 138.81 yen , after hitting its highest since July 21, while the offshore yuan fell to a fresh two-year low of 6.9321 per dollar.

Sterling fell to a 2-1/2-year low of $1.1649 and was last down 0.5% at $1.1676.

“I think this week (the US dollar index) is going to track even higher towards 110 points, just as market participants continue to price in more aggressive tightening cycles by the major central banks,” said Carol Kong, senior fellow for currency strategy and international economics at Commonwealth Bank of Australia.

Speaking at the Jackson Hole Symposium, ECB board member Isabel Schnabel, French central bank governor Francois Villeroy de Galhau and Latvian central bank governor Martins Kazaks all argued for strong or significant policy action.

Even as the potential for a big ECB rate hike in September rises, the euro has struggled amid an energy crisis in the bloc that is raising recession risks. Russian state energy giant Gazprom ( GAZP.MM ) is expected to halt natural gas supplies to Europe from Aug. 31 to Sept. 2. read more

And as risk-off sentiment gripped global markets, the Australian and New Zealand dollars also succumbed to selling pressure.

The Aussie dollar fell to $0.6838, its lowest since July 19, while the kiwi hit its lowest since mid-July at $0.61.

In cryptocurrencies, Bitcoin bounced back a bit, but stayed below the $20,000 level it sank below over the weekend. read more

Reporting by Dhara Ranasinghe; additional reporting by Rae Wee in Singapore; editing by Christina Fincher

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