Dollar Increases As Fed Announces Hawkish Policies

Early on Wednesday in European trading, the U.S. dollar increased slightly, holding onto gains made overnight because of heightened geopolitical concerns and after Federal Reserve members hinted at future rate rises.

The Dollar Index, which measures the value of the US dollar against a basket of six other currencies, was trading 0.1 percent higher at 106.263 at 02:55 AM ET (06:55 GMT), having earlier recovered 1 percent from its overnight decline to a nearly one-month low of 105.03. In the United States, the number of open positions decreased more drastically than anticipated in June, reaching its lowest level since September. This is concerning news ahead of Friday’s official employment report.

The Fed’s officials were not persuaded that the moment had come to roll back the central bank’s aggressive tightening of monetary policy, despite this indication of a softening U.S. job market. Three Fed officials, including well-known dovish Chicago Fed President Charles Evans and San Francisco Fed President Mary Daly, gave a warning on Tuesday that there will be no easing in the steep rate increases, even though they might sharply slow economic growth.

Closer Look into Monetary Markets

U.S. Treasury rates increased, pushing the 2-Year yield back above 3% and increasing the dollar index to its highest level in three weeks. After U.S. House of Representatives Speaker Nancy Pelosi visited Taiwan, a province that is still governed by China, the dollar saw modest demand from safe-haven flows. Pelosi is the highest-ranking American official to visit the island in 25 years, and her visit poses a risk to the stability of Sino-American relations.

The rising U.S. Treasury rates impacted the USD/JPY, which increased 0.1 percent to 133.25. The recent rebound of the yen over the previous week came to an end after the Japanese currency registered its biggest four-day run since the early days of the COVID outbreak. Before the publication of retail sales and PPI statistics for the Eurozone, the EUR/USD slipped 0.1 percent to 1.0155, while the GBP/USD lost 0.1 percent to 1.2167. On Thursday, the Bank of England is generally expected to raise its benchmark rate by 0.5 percent to 1.75 percent.

Since most of this increase has already been factored in, traders will pay close attention to the central bank’s signals throughout the remainder of the cycle. While USD/CNY remained essentially constant at 6.7537 despite a private poll suggesting that service sector activity in the mainland expanded at a quicker pace in July than it did in June, AUD/USD increased 0.1 percent to 0.6927.