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Fed Rate Hike Forecast Drive Up The Dollar

On Friday, the US dollar index record its biggest gain in a week since April 2020, as the currency touched a high of five weeks.

This was after investors adjusted their expectations about the US Federal Reserve continuing to increase interest rates in order to curb inflation.

The Fed’s stance

On Thursday, several officials of the US central bank stated that they need to continue increasing borrowing costs for taming inflation that has reached four-decade highs.

But, they were still debating how high the interest rates should be lifted and how quickly they should go about it.

Market analysts said that the US Fed still has a lot of work to do, but the market was not really thinking that way after the July Federal Open Market Committee (FOMC) meeting.

They said that the Fed’s goal was to get inflation down to their 2% target and that still had a long way to go.

The Federal Reserve seems to have more room to increase its interest rates, as opposed to other central banks of major economies that have turned out to be more fragile.

The US dollar

There was a 0.61% increase in the US dollar index, which climbed to 108.13, which is the highest the currency has been since July 15th.

Meanwhile, a 0.54% drop was recorded in the euro, which brought it down to $1.0033, which is the lowest it has been since July 15th.

There was a 0.73% gain in the greenback against the Japanese yen, which saw it reach its strongest level since July 27th.

As for the Sterling, the British Pound recorded a drop of 1.03% against to dollar to $1.813. This resulted in the currency’s biggest drop in a week against the greenback since September 2020.

Market analysts said that there would be a real weakening in the US dollar when the Fed becomes more concerned about growth rather than inflation and that point has not come as yet.

But, they do expect the European Central Bank (ECB) to stop increasing interest rates in the next year because of spreads and growth concerns.

The euro has already gotten exposed to the slowdown in the Chinese market and worsening terms of trade.

Other factors

On Friday, the euro was also weakened because of Gazprom’s announcement that they would shut down the Nord Stream 1 pipeline for maintenance from August 31st to September 2nd.

This pipeline carries gas from Russia to Germany under the Baltic Sea.

There is a 55% expectation priced in Fed funds futures of the Fed hiking its interest rate by 50 basis points in its meeting next month.

The expectation of a 75 basis points increase stands at 45%. According to US central bank officials, there is still time before they decide how big the interest rate hike would be in their next meeting.

There is a symposium in Jackson Hole on August 25th where Jerome Powell, the Chairman of the Fed, is expected to give an update to the market about his views.

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