US Dollar Hits Two-Decade High as Fed Announces Big New Hikes

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  • Euro slips to lowest level in two decades
  • The Fed raises rates by 75 basis points, as expected; flags more hikes

NEW YORK, Sept 21 (Reuters) – The dollar hit a new two-decade high on Wednesday after the Federal Reserve raised interest rates another 75 basis points and signaled bigger increases at its upcoming meetings .

Dollar gains were limited as the Fed’s decision was widely expected. Still, since US rates will be higher for longer, the trend remains supportive of the dollar for some time, analysts said.

The Fed’s new projections showed its key rate rising to 4.4% by the end of the year, before peaking at 4.6% in 2023 to rein in uncomfortably high inflation. Rate cuts are not expected before 2024. read more

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Fed Chairman Jerome Powell in his press briefing said there was no painless way to bring inflation down, reiterating he wanted to act aggressively now and stick to it. . He added that the Fed’s actions would likely lead to slower growth and higher unemployment. Read more

The dollar index hit a fresh 20-year high at 111.63 on the back of the Fed’s rate hike, and was last up 0.7% at 110.97.

“We expect the US dollar to remain firm in the near term, but we remain reluctant to factor in further and sustained gains in the US dollar from here and believe it would be complacent to dismiss outright downside risks here,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.

He said the dollar has become significantly overvalued. Year-to-date, the dollar index has climbed nearly 16%, the biggest annual percentage gain since at least 1972, when Refinitiv began the data series.

Osborne also said higher rate expectations in the United States have already been priced into the dollar, with the top federal funds rate, or key US central bank rate, having risen more than 100 basis points since August. .

The euro, the largest component of the dollar index, fell to its lowest level in 20 years, hitting $0.9810. Europe’s single currency last changed hands at $0.9852, down 1.2%.

Against the yen, the dollar posted minor gains against other currencies, reaching 144.695 yen. The greenback last traded at 143.98 yen, up 0.2% on the day. Traders remained cautious about pushing the dollar higher given the threat of Japanese intervention to boost the yen.

“They (the Fed) have a brief window to act aggressively, and they seem eager to use it,” said Jan Szilagyi, co-founder and CEO of Toggle AI, an investment research firm.

“There is another reason to anticipate the hikes. Public and market tolerance for tighter monetary policy is much higher with the unemployment rate below 4%, an all-time low.”

The British pound fell to a new 37-year low at $1.1237 and last traded at $1.1272, down nearly 1%.

Earlier in the session, the dollar posted gains after Russian President Vladimir Putin’s decision 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 might of its entire vast arsenal if the West continued what he called “nuclear blackmail” over the conflict there. Read more

European currencies bore the brunt of the sell-off in currency markets as Putin’s comments heightened concerns over the economic outlook for a region already hard hit by Russia’s cut in gas supplies to the EU. Europe.

Osborne noted that elevated geopolitical risks have supported the dollar as a safe haven and alternatives are scarce in the developed world.

“We think the time is right for a correction in the US dollar, but the dollar bears will have to be patient for a bit longer,” he said.

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Bid rates for currencies at 3:46 p.m. (1946 GMT)

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Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Dhara Ranasinghe in London; Editing by Kirsten Donovan and Deepa Babington

Our standards: The Thomson Reuters Trust Principles.

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