The US dollar started the new dip, making it lower on the index. The dollar dropped to almost a year and a half low against the Euro as more pro-high interest rate comments pervaded in the course of the weekend by Federal Reserve officials. The hawkish statements brought the US yield curve to its flattest position in about three straight months.
The Fed Effect
Although the Federal Reserve had clearly communicated that it would raise interest rates in March after its two-day policy meeting last week, some investors still think policymakers are in the process of preparing the financial markets for s rapid trend of interest rate increment before the end of the year to place a proper check on growing inflation.
While a fast pace of increasing rates will curb inflation, it could also hamper expected economic growth. A similar case is currently at play in the bonds market, where a spread between the 2-year and 10-year US Treasury yields dropped under 59 basis points for the first time since November 2021. It has been tagged the bear-flattening.
Meanwhile, the markets remain uncertain of the effects of the coming Federal Reserve’s rate increase pattern on economic growth and inflation, yet, a few investors seized the opportunity of the recent comments by the Fed’s officials to earn profits on the dollar’s latest rally.
A financial strategist, Mizuho, said that the general atmosphere where market players are expecting up to five interest rate increases this year shows the general belief that the Federal Reserve is the architect of the curve in confronting upside inflationary risks and it will need to give more tightening.
International Rates and Banks
In comparison with some other fiat currencies, the dollar slipped some 0.2% to 97.02 following a rise to the mid-2020 height of 97.44 last Friday. The dollar’s leap to 1.6% last week was its highest weekly increase since the middle of 2021. The longest dollar positions are close to their highest levels this year.
Australia’s dollar (AUD) is part of the fast-rising currencies against the struggling USD on Monday as the AUD increased by over 0.5% at $0.7043 ahead of the central bank’s monetary policy meeting slated for Tuesday.
The Bank of England’s policy meeting is also slated to hold on Thursday.
Ahead of the Bank of England’s meeting, Reuters held a poll of financial analysts and economists where their general prediction was that there might be another interest rate increase, making it the second in just about two months, as the bank cuts back on COVID stimulus packages following a more than 30 years inflation record.
The policy meeting of the European Central Bank is also slated for Thursday, with analysts warning that the incoming rate increase from the US Federal Reserve will reduce the ECB’s chance to react to the effects.