By Alun John and Gertrude Chavez-Dreyfuss
LONDON/NEW YORK, Sept 20 (Reuters) – The dollar rose on Tuesday, trading near a two-decade high as investors held on in anticipation of another aggressive Federal Reserve rate hike, the centerpiece of a week of central bank meetings.
The Fed begins a two-day meeting on Tuesday, with rate futures traders pricing in an 81% chance of a 75 basis point hike and a 19% chance of a 100 basis point hike. FEDWACH
The dollar index was on course for its fifth weekly gain in six weeks, last up 0.5% to 110.04 = US dollars. It’s not far from 110.79, a level hit earlier this month for the first time since June 2002.
“Traders and investors are running for cover, aware that the dollar is acting like a force of nature and unwilling to face its wrath,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
“That means the greenback — without slowing it down until Wednesday — is likely following Newton’s first law: A moving object stays in motion until an outside force acts on it.”
The market was also rocked on Tuesday by Sweden’s central bank, which hiked interest rates by a full percentage point. The Riksbank’s rate hike was larger than analysts had expected, causing the Swedish krona to briefly rise against the euro and the dollar.
He failed to hold on to that strength. The euro extended recent gains to hit a fresh six-month high of 10.8590 kroner. The euro was last up 0.6% to 10.8643 EURSEK=D3. The dollar was also up 0.6% to 10.8764 kroner. SEC=D3
“In a way, this was an attempt by the Riksbank to hike the krone, but it failed and it’s not surprising,” said Francesco Pesole, currency strategist at ING.
He said the relationship between European currencies and central bank policies had broken down as markets increasingly traded on Europe’s energy and growth prospects.
Added support for the dollar, the US 2-year Treasury yield US2YT=RRwhich is sensitive to interest rate policy expectations, rose as high as 3.992%, its highest level since November 2007.
The Euro EUR=EBS slipped 0.4% to $0.9981 after falling to $0.9864 for the first time in two decades on September 6, while sterling weakened EUR=D3 fell 0.2% to $1.1402.
The Bank of England is due to decide policy on Thursday and investors are split on whether a 50 basis point hike or a 75 basis point hike is imminent.
The Bank of Japan also meets this week, but is widely expected to keep its ultra-loose stimulus settings unchanged – including setting the 10-year yield near zero – to support a fragile economic recovery.
The yen has suffered a setback on this policy and the dollar was last up 0.4% against the Japanese currency to 143.78, continuing a week-long consolidation after falling to 144 for the first time in 24 years on September 7th .99 had risen.
The dollar-yen currency pair generally follows the long-term yield spread between US and Japanese government bonds and was therefore little affected by data showing that inflation was high, at least by Japanese standards.
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Currency bid prices at 10:39 (1439 GMT)
US Close previous session
YTD percent change
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GRAPHIC- World FX Rateshttps://tmsnrt.rs/2RBWI5E
GRAPHIC Central banks intensify fight against inflationhttps://tmsnrt.rs/3QWnMdN
(Reporting by Alun John in London and Gertrude Chavez-Dreyfuss in New York; Additional reporting by Kevin Buckland in Tokyo; Editing by Chizu Nomiyama and Lisa Shumaker)
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