Before a week packed with market vacations and central bank decisions from Washington to London to Tokyo, the dollar hovered close to a two-decade high on key rivals on Monday. The dollar index, which compares the value of the dollar to six other currencies, was 0.2% higher than Friday at 109.84, settling after a choppy two weeks that saw it reach a high of 110.79 on September 7 for the first time since mid-2002.
As U.S. consumer price increases have proven to be obstinately persistent, investors have been compelled to price in higher U.S. interest rates and a stronger dollar. Markets currently anticipate a raise of at least 75 basis points for this week’s Federal Open Market Committee meeting, with a 19% chance of a supersized increase of one full percentage point.
In addition, there are other holidays this week that could reduce liquidity and cause stronger price movements, including those in Australia on Thursday, Japan again on Friday, and Britain, Japan, and Britain on Monday.
The euro, pound, and pro-cyclical currencies like the Australian dollar will remain under pressure due to the unfavourable economic outlook. As economic concerns and the potential for additional benchmark interest rate reduction linger on Tuesday, the value of the Chinese yuan was held near the poorer side of 7 per dollar. Sterling dropped 0.2% to $1.1403, slightly above Friday’s $1.1351 37-year low.
On Thursday, the Bank of England is expected to hike rates by either 50 or 75 basis points, according to the markets. Investors had little cause for celebration when the euro dropped below parity to $0.9995, as an energy crisis seemed certain to send Europe into a wintertime slump.
After data revealed that UK retail sales plunged significantly in August as the rise in the cost of living continued to affect consumers, the pound dropped to a fresh 37-year low against the US dollar.
The Australian dollar dropped 0.2% to $0.6710, not far from the $0.6670 low it reached on Friday which was its lowest point since mid-2020. The New Zealand dollar was trading at a recent low of $0.5974.
