Dollar approaches 20-year highs, Fed meeting in focus

By Karen Brettell

NEW YORK (Reuters) – The dollar held just below a 20-year high against a basket of currencies on Monday before an expected Federal Reserve rate hike this week, with traders focused on the potential for the U.S. central bank to adopt an even more hawkish tone than expected.

The Fed has taken an increasingly aggressive approach to monetary policy as it tackles inflation that is soaring at its fastest pace in 40 years. It is expected to hike rates by 50 basis points and announce plans to reduce its $9 trillion balance sheet when it concludes its two-day meeting on Wednesday.

Though the chances are seen as low, some investors are watching for the possibility of a 75 basis point hike, or a faster pace of balance sheet reduction than currently expected.

“A lot of traders are anticipating that the Fed’s not going to back down from this hawkish stance and you could still see some hawkish surprises, and that’s why the dollar is likely to hold on to its gains heading into the meeting,” said Edward Moya, a senior analyst with OANDA in New York.

Comments by Fed Chairman Jerome Powell at the conclusion of the meeting will also be scrutinized for any new indications on whether the Fed will continue to hike rates to battle rising price pressures even if the economy weakens.

The dollar was last at 103.51 against a basket of currencies, after reaching 103.93 on Thursday, the highest since Dec. 2002.

The euro was at $1.0513, after dropping to $1.0470 on Thursday, the lowest since Jan. 2017.

The single currency was hurt after data showed euro zone manufacturing output growth stalled last month as factories struggled to source raw materials, while demand took a knock from steep price increases.

It has suffered from concerns about inflation, growth and energy insecurity as a result of sanctions imposed on Russia after its invasion of Ukraine.

Global growth concerns have also boosted demand for the greenback as China shuts down cities in an attempt to stem the spread of COVID-19. Authorities in Shanghai on Monday reported 58 new cases outside areas under strict lockdown, while Beijing pressed on with testing millions of people.

The dollar gained 0.6% versus the Chinese yuan in offshore markets, reaching 6.6824, just below the 6.6940 touched on Friday, which was the highest since Nov. 2020.

The Japanese yen held just above 20-year lows reached against the dollar on Thursday, when the Bank of Japan strengthened its commitment to keep interest rates ultra-low by vowing to buy unlimited amounts of bonds daily to defend its yield target.

The Japanese currency was last at 130.14, after after reaching 131.24 on Thursday, the weakest since April 2002.

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Currency bid prices at 9:40AM (1340 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 103.5100 103.2900 +0.22% 8.203% +103.5700 +103.1000

Euro/Dollar $1.0513 $1.0542 -0.27% -7.52% +$1.0575 +$1.0503

Dollar/Yen 130.1350 129.8500 +0.24% +13.07% +130.4750 +129.6200

Euro/Yen 136.86 136.90 -0.03% +5.02% +137.6300 +136.5600

Dollar/Swiss 0.9762 0.9735 +0.28% +7.02% +0.9763 +0.9717

Sterling/Dollar $1.2537 $1.2577 -0.31% -7.29% +$1.2596 +$1.2536

Dollar/Canadian 1.2903 1.2865 +0.30% +2.06% +1.2907 +1.2843

Aussie/Dollar $0.7047 $0.7059 -0.16% -3.04% +$0.7082 +$0.7033

Euro/Swiss 1.0263 1.0263 +0.00% -1.02% +1.0269 +1.0229

Euro/Sterling 0.8385 0.8385 +0.00% -0.18% +0.8408 +0.8368

NZ $0.6427 $0.6459 -0.48% -6.09% +$0.6474 +$0.6422

Dollar/Dollar

Dollar/Norway 9.4655 9.3700 +0.95% +7.37% +9.4845 +9.3770

Euro/Norway 9.9523 9.8831 +0.70% -0.61% +9.9929 +9.8630

Dollar/Sweden 9.8947 9.8196 +0.44% +9.72% +9.9090 +9.7899

Euro/Sweden 10.4035 10.3582 +0.44% +1.66% +10.4297 +10.3480

(Additional reporting by Tommy Wilkes in London; Editing by Kirsten Donovan)