The dollar remained strong near a two-decade high versus major peers on Tuesday as investors held firm in expectation of another aggressive rate hike by the Federal Reserve, the centrepiece of a week packed with central bank meetings.
Sweden’s central bank set the tone for the week by raising rates by a full percentage point on Tuesday. The rate hike by the Riksbank was larger than analysts had expected, causing the Swedish crown to briefly spike against the euro and dollar.
It failed to hold on to that strength however, and the euro extended recent gains, climbing to a fresh six month top of 10.846 crowns. The dollar also climbed 0.36% to 10.82 crowns.
“In a way this was an attempt by the Riksbank to lift the krona, 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 been breaking down as markets increasingly traded on the energy and growth outlook for Europe instead.
GRAPHIC: Central banks ramp up fight against inflation
The main central bank event this week, however, is the Fed, which begins its two-day rate-setting meeting later on Tuesday. Markets have fully priced another 75 basis point increase, with around a 15% chance of a super-sized full percentage point increase, according to CME’s Fedwatch tool.
The dollar index, which measures the greenback against six counterparts, was 0.2% stronger 109.82, heading back to the 110.79 it hit earlier this month, a level not seen since June 2002.
Providing additional support, the two-year U.S. Treasury yield, which is extremely sensitive to policy expectations, rose as high as 3.992% in early London trade, its highest since November 2007.
Pesole said markets would pay some attention to U.S. housing data due later in the day, though moves would likely be a little less pronounced with markets in a holding pattern ahead of the outcome of the Fed’s meeting.
The euro slipped a whisker on the dollar to $1.0013. It dropped as low as $0.9864 on Sept. 6 for the first time in two decades, while beaten-down sterling was a touch firmer at $1.1446.
The Bank of England will decide policy on Thursday, and investors are split over whether a 50 or 75 basis point hike is on the way.
The Bank of Japan also meets this week but is widely expected to keep its ultra-easy stimulus settings unchanged — including pinning the 10-year yield near zero — to support a fragile economic recovery.
The yen has taken a kicking due to this policy and the dollar was last up 0.27% on the Japanese currency at 143.59, continuing a week-long consolidation after climbing as high as 144.99 on Sept. 7 for the first time in 24 years.
The dollar-yen currency pair tends to track the long-term yield spread between U.S. and Japanese government bonds, and so was little affected by data that showed inflation was hot, at least by Japanese terms.
“CPI was very strong, but the BOJ will likely keep policy unchanged, so expectations about Fed policy are more important” for currency markets, said Tohru Sasaki, a strategist at J.P. Morgan in Tokyo.
“Dollar-yen will eventually break above 145, but the speed depends on how hawkish the Fed is, and developments in interest rate differentials.”