On Thursday, the US dollar index climbed to a high of one month, as officials of the Federal Reserve talked about the need for more interest rate hikes.
Meanwhile, investors were also reevaluating the minutes of the July meeting of the US central bank released on Wednesday as being more hawkish than assumed previously.
Borrowing costs to increase
On Thursday, a number of officials of the US Federal Reserve said that they need to continue increasing borrowing costs in order to bring the rising inflation under control.
However, there is still ongoing debate about how fast the rates should be lifted and how high they should go.
James Bullard, the President of the St. Louis Fed, said that he was thinking about supporting another hike of 75 basis points in the September meeting.
Mary Daly, the President of the San Francisco Fed, said that it would be reasonable to hike interest rates by 50 or 75 basis points next month to increase borrowing costs above 3% this year and higher next year.
Market analysts said that the Fed had stuck to the same rhetoric from the beginning that they are going to raise rates.
Hawkish stance
On Wednesday, after the release of the minutes of the Fed’s previous meeting, the dollar had pared some of the gains it had made.
This was because the minutes had shown that officials of the central bank were worried about raising the rates to aim to get inflation under control and had been perceived as dovish.
Moreover, the minutes also highlighted another essential aspect of the Fed’s debate in the next few months; when the rate hikes should be slowed down.
However, analysts said that focusing on these aspects of the minutes was wrong rather than the primary view that rates need to continue climbing.
They said that excluding the part about slowing the pace of hikes, the rest of the minutes seemed to be very hawkish.
Dollar movements
There was a 0.71% increase in the dollar index after it touched 107.57, which is the highest it has been since July 19th.
As for the euro, it came down to $1.0078, the currency’s weakest value since July 18th. The greenback also climbed to 135.90 against the Japanese yen, which is the weakest the currency has been since July 28th.
Sterling also declined to $1.1920, which is its lowest value since July 22nd. Since the release of the minutes, the probability of a 75-basis point increase in the next month has come down to 42%.
It had been 52% on Wednesday and now there is a 58% probability that interest rates would climb by 50 basis points in September.
However, the size of the rate hike is likely to be determined by the jobs and consumer price inflation data for August, which is due to release before the September meeting of the Fed.
In addition, the meeting is also expected to provide more information about how far the officials expect the rate to rise.
