On Monday, the dollar reached a 20-year high on Monday due to the hawkish comments of Jerome Powell, the Federal Reserve’s chairman.
However, it was kept in check, as the euro also received a boost because of growing expectations that there would also be a significant rate hike by the European Central Bank (ECB).
The US dollar index climbed to 109.48 in the session, which it has not done since September 2002. The index measures the currency against a basket of its peers.
The greenback was able to extend the gains it had recorded on Friday after Powell’s speech at the central banking conference in Jackson Hole, Wyoming.
The central bank chief had said that would continue to increase interest rates for restricting growth and would keep them high for some time in order to reduce inflation which is about 3 times the Fed’s target of 2%.
Market analysts said that the Fed chair had come off as extremely hawkish on Friday and this had dashed the hopes of a pivot in policy early in the coming year.
Rate hikes and data
Money markets have priced in yet another aggressive rate hike in September by the US Federal Reserve and the possibility of a three-quarter rate hike has now climbed to 70%.
There was also a rise in US Treasury yields, as two-year bond yields reached 3.49%, which is a high of 15 years.
Traders have now turned their focus towards the US employment report for August, which is due on September 2nd.
This is because the data would provide a last major look at the health of the US economy in the face of inflation that continues to be stubbornly high and rising rates before the Fed is scheduled to meet.
The euro also recorded gains, as it got support from comments made by a European official that hinted at a possible rate hike by the ECB of 75 basis points in its meeting on September 8th.
On Saturday, a board member of the ECB, Isabel Schnabel warned that there was a risk of the central bank losing the trust of the public.
Therefore, they need to act forcefully in order to tame inflation, even if that means driving their economies into a recession.
Currency analysts said that the euro had stolen some of the greenback’s thunder for the day and this was because of the possibility that the ECB could also match the Fed in terms of rate hikes.
The euro had last recorded gains of about 0.29%, but it was still below parity against the greenback at $0.9993.
Market analysts said that central banks were only going to be hawkish for now because of the inflation numbers and this means that an aggressive hike in interest rates should be expected.
The greenback recorded gains of 0.78% against the Japanese yen at 138.76. Meanwhile, the British pound recorded a drop to $1.1649, which is a two and a half year low.