The dollar has reached a fresh two-decade high, while sterling is once again on the ropes.
On Wednesday, the dollar reached a new two-decade high versus a basket of currencies on the back of rising Treasury yields, while sterling remained near a two-decade low on fears over Britain’s drastic tax cuts to promote development.
In Asia trade, the US dollar index reached a new high of 114.68 and was last up 0.42% at 114.62.Meanwhile, 10-year US Treasury yields surpassed 4% for the first time since 2010, peaking at 4.004%. The two-year yield was 4.2912%.
“It’s a combination of the spillover from the UK, where gilt yields have skyrocketed. And this has ricocheted into other DM bond markets, creating a bit of a ricochet impact “Moh Siong Sim, a currency analyst at Bank of Singapore, concurred.
“Of course, this is against the backdrop of the Fed’s extremely determined statement to do whatever it takes to get inflation down.”
Chicago Fed President Charles Evans, St. Louis Fed President James Bullard, and Minneapolis Federal Reserve Bank President Neel Kashkari all repeated the Fed’s hawkish attitude overnight, with Evans stating that interest rates should be raised to a range of 4.50% to 4.75%.
Sterling was down over 1% to $1.0634, reversing a tiny 0.4% gain in the previous session and continuing to suffer heavy losses after falling to an all-time low of $1.0327 at the start of the week.
Huw Pill, Chief Economist at the Bank of England, indicated overnight that the central bank is expected to make a “major policy reaction” to finance minister Kwasi Kwarteng’s massive tax cuts.
However, he noted that the central bank intends to wait until its next planned meeting in November before making a decision, putting an end to market speculation about an inter-meeting interest rate hike.
“I think sterling will continue very weak in the near term,” said Carol Kong, senior economist for international economics and currency strategy at the Commonwealth Bank of Australia.”It’s really a confidence problem. It will be up to the UK government, not the Bank of England, to address this.”
The strengthening dollar drove other currencies to multi-year lows on Wednesday, with the Australian dollar falling to $0.6389, its lowest level since May 2020. The kiwi fell roughly 1% to $0.55645, its lowest level since March 2020.
The Chinese offshore yuan plummeted to 7.2349 per dollar, the lowest level since such data was made available in 2011.
According to Reuters, Chinese monetary officials are pushing local banks to restart a yuan fixing instrument that was abandoned two years ago in order to steer and protect the rapidly sinking currency.
The euro fell 0.4% to $0.9555, not far from its previous 20-year low of $0.9528, with the latest flare-up in the eurozone’s gas issue adding to the single currency’s bleak outlook.
On Tuesday, Europe launched an investigation into what Germany, Denmark, and Sweden claimed were attacks on two Russian gas pipelines at the centre of an energy conflict.
In other news, the yen yesterday bought 144.68 per dollar, aided slightly by Japan’s intervention last week to prop up the ailing currency.
“What would actually impact the yen’s value is if the BOJ abandons or resets their yield curve control policy,” said Pablo Calderini, chief investment officer at hedge fund Graham Capital.”As long as you keep a rate differential of 4%, it will be really hard to see a significant appreciation of the yen.”
