Dollar rises to two-decade high as Putin shakes currency market ahead of Fed

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  • Dollar index at two-decade high
  • The euro slips back towards its lowest level in two decades
  • Putin announces partial troop mobilization for Ukraine
  • The markets are measuring the Fed’s hawkishness in the Powell briefing

LONDON/NEW YORK, Sept 21 (Reuters) – The dollar rose to a new two-decade high on Wednesday ahead of another expected aggressive rate hike by the Federal Reserve, as investors fled for safety following a decision by Russian President Vladimir Putin to mobilize more troops for the conflict in Ukraine.

Putin on Wednesday called up 300,000 reservists to fight in Ukraine and said Moscow would respond with the force of its vast arsenal if the West pursued what he called its “nuclear blackmail” over the conflict there. read more

The news pushed the dollar index, which measures the dollar’s value against six major currencies, to 110.87 <=USD>the strongest level since 2002.

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The dollar index is up almost 16% this year and set for its biggest annual increase since 1981. It last traded at 110.71, up approx. 0.5% on the day.

“Most of the dollar moves today are Putin-related,” said Steven Englander, head of global G10 FX research and North America macro strategy at Standard Chartered in New York.

“Looking at my table, the five worst performing currencies are the Swedish krona, Polish zloty, Czech koruna, Hungarian forint and euro. It is more of a concern for Putin because of hints that Russia may escalate the conflict in Ukraine and on what limits he takes on the weapons they use.”

Dollar index at two-decade high ahead of Fed

European currencies bore the brunt of the sell-off in foreign exchange markets as Putin’s comments exacerbated concerns about the economic outlook for a region already hit hard by Russia’s squeeze on gas supplies to Europe.

The euro fell to a two-week low of $0.9885, within sight of two-decade lows earlier this month. It was last down 0.7% at $0.9901.

Sterling fell to a new 37-year low of $1.1304 and was last down 0.5% at $1.1335

Later on Wednesday, the Fed is expected to raise interest rates by three-quarters of a percentage point for the third time in a row and signal how much longer and how quickly borrowing costs must rise to tame inflation. read more

The political decision, due at 1800 GMT, will mark the latest move in a synchronized policy shift by global central banks that is testing the resilience of the world economy and countries’ ability to deal with exchange rate shocks as the value of the dollar rises.

“What the market is looking for is whether (Fed Chair Jerome) Powell says the Fed doesn’t know how far they have to go and they will go as far as they need to go,” Standard Chartered’s Englander said.

“If someone asks him if he sees interest rates going to 5% and he says he doesn’t see it, but doesn’t rule out that it is necessary to bring down inflation, then that would be very hawkish and mean they are opening up rates to an even higher range than what the market expects.”

The Australian and New Zealand dollars, meanwhile, fell to multi-year lows. The Aussie dollar hit a low of $0.6655, its lowest since June 2020, while the New Zealand currency fell to $0.5873, its lowest since April 2020.

Against a battered yen, the dollar rose 0.2% to 143.97, paring past 24-year highs

“It was interesting to me that USD/JPY dipped on news of the announcement, potentially indicating a return of the yen’s safe-haven credentials that have been absent for much of the year,” said Colin Asher, senior economist at Mizuho Corporate Bank.

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Bid prices in currency at 10:42 (1442 GMT)

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Reporting by Dhara Ranasinghe in London and Gertrude Chavez-Dreyfuss in New York; Additional reporting by Lucy Raitano; Editing by Edwina Gibbs, Catherine Evans and Mark Heinrich

Our standards: Thomson Reuters Trust Principles.

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