Dollar hits two-decade high as markets bet on 0.75% jump in US rates

The dollar hit a fresh two-decade high against a basket of currencies on Tuesday, as traders braced for an aggressive rate hike from the US Federal Reserve this week to try to curb inflation.

Investors have been unsettled this week by rising expectations that the Fed will raise interest rates by more than forecast, sending the S&P 500 tumbling to confirm a bear market and intensified fears over the economic outlook.

The Fed’s open market committee meeting comes just days after the latest economic data suggested that price pressures had become more relentless than expected. Before figures released on Friday — which showed prices jumped another 1 per cent in May from the previous month — the Fed had signalled it was poised to approve a second consecutive half-point rate increase.

But a larger rise of 0.75 percentage points is now likely to be under consideration. Markets have now almost fully priced in that outcome and there is a nearly 90 per cent expectation for a 75-basis-point increase at the conclusion of the two-day meeting, according to Refinitiv’s Fedwatch Tool. Economists at JPMorgan, Goldman Sachs and Barclays are all now anticipating a 0.75 percentage point rise — which would be the first since 1994.

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Shares had another bumpy day globally but losses were more moderate after Monday’s losses with markets taking their ringside seats as the Fed meeting started.

“Ultimately, even though we are seeing even more red and more negative pressure here, in general today we believe is really a wait-and-see day,” said Greg Bassuk, chief executive at AXS Investments in Port Chester, New York.

In the US, the S&P 500 index of shares ended lower with the index unable to bounce from a sharp sell-off in the prior session as it awaited the key policy statement from the Fed. That chalked up its fifth straight daily decline, marking its longest losing streak since early January. Monday’s declines had put the index down more than 20 per cent from its most recent record high, confirming a bear market began on January 3rd, according to a commonly used definition.

The Dow Jones Industrial Average fell 151.91 points, or 0.5 per cent, to 30,364.83, the S&P 500 lost 14.15 points, or 0.38 per cent, to 3,735.48 and the Nasdaq Composite added 19.12 points, or 0.18 per cent, to 10,828.35.

Earlier, shares in Europe tumbled for the sixth day in a row, marking their longest losing streak since the early days of the pandemic in March 2020. Indices across the continent in many cases shed about 1 per cent or slightly more.

In Ireland, the only notable winners were the banks as equities largely waited in vain for a bounce after Monday’s sell-off. The Iseq index closed down 1.5 per cent, underperforming many of the broader European indices after having fallen 2.4 per cent on Monday. But London staged something of a mid-session rally to limit losses on the FTSE-100 to 0.3 per cent.

“It’s going to be very difficult for the Fed to out-hawk markets at this point, given the level of expectations going into tomorrow,” said Karl Schamotta, chief market strategist at business payments company Corpay.

The US Dollar Currency Index, which tracks its performance against six other major currencies, was up 0.3 per cent at 105.42, after climbing as high as 105.46, its strongest since December 2002. With inflation and growth-related concerns plaguing economies around the world, the dollar has benefited from safe-haven flows in recent weeks and months.

“The US dollar remains the best of a bad bunch in FX land,” said Michael Brown, head of market intelligence at payments firm Caxton in London. — Reuters / Bloomberg / The Financial Times Limited 2022