By Tom Westbrook
SINGAPORE, Sept 16 (Reuters) – The dollar was hanging on to recent gains on Wednesday, trading near multi-week highs against a handful of major peers ahead of a Federal Reserve decision that traders expect will bring the first of several possible U.S. interest rate hikes.
The dollar has advanced along with yields this week, running furthest against the yen and New Zealand dollar, which hit a two-month low of $0.5737 in the Asia session, while the yen touched a one-week low of 155.43 per dollar.
“A 25-basis-point increase is about 90% priced, implying the dollar will receive a modest boost if the Fed increases,” said Carol Kong, currency strategist at the Commonwealth Bank of Australia in Sydney.
“There is a small chance the dollar eases if the (Fed) hikes but (chair Kevin) Warsh plays down the risk of follow-up hikes in the press conference. In the event the Fed does not increase the funds rate, we expect a steep 1%+ fall in the dollar.”
At $1.1545 the euro was not far from Monday’s one-month low of $1.1523, while sterling, at $1.3478, was not far above a six-week trough of $1.3464 it had made on Monday.
The Bank of England is expected to leave rates steady when it meets on Thursday. [GBP/]
The Aussie dollar steadied at $0.7129. [AUD/]
Currency markets have not moved that much while global bond yields have climbed in concert over recent weeks, because sovereign bonds have moved in tandem and not shifted relative differences between countries’ yields very far.
But the dollar gained traction in the last few sessions on thinking that despite President Donald Trump hiring Warsh to cut interest rates, he will need to hike a few times to show the Fed is serious about taming inflation fanned by the Iran war and the resulting energy price surge.
“Especially given that the Fed has lost a bit of credibility with the markets, we are a bit sceptical that one, or even two, hikes are going to be enough to restore that credibility,” said Calvin Tse, head of U.S. strategy and economics at BNP Paribas.
YEN TEST
The exceptions to the broad steadiness in foreign exchange are mostly in Asia and the Fed decision should also be a big factor for the yen.
The yen is in the midst of its most promising rally for months on a combination of a hawkish shift in expectations for Japanese interest rates, joint intervention by Japan and the U.S. and talk of Japanese investors repatriating capital.
Traders see an 80% chance that the Bank of Japan hikes rates on Friday, LSEG data show, and have priced in two 25-basis-point hikes by the end of January.
“The yen’s path will continue to depend heavily on interest rate differentials,” David A. Meier, economist at Julius Baer, said in a research note.
“We recently revised our USD/JPY forecasts to 155, reflecting some scepticism that the central bank can ultimately satisfy the pace of tightening currently priced in by markets,” he added.
“Many uncertainties remain, including the political preference for low interest rates amid ongoing fiscal expansion.”
Other regional standouts are South Korea’s won, which has ripped more than 15% higher against the dollar since the end of June, riding a wave of repatriated capital and profits generated by chipmaking giants, and China’s steadfast yuan. [.KS]
A long rally in the yuan has lost momentum at around 6.71 to the dollar, but the currency is holding its gains despite a widening gap between low Chinese yields and rates elsewhere. [CNY/]
(Reporting by Tom Westbrook; Editing by Michael Perry and Clarence Fernandez)
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