The Dollar held on to its recent gains on Wednesday, trading close to multi-week highs against a basket of major currencies as markets looked ahead to a Federal Reserve decision that traders expect could mark the start of a series of US interest rate increases.
The greenback has climbed alongside US Treasury yields this week, with its strongest gains coming against the Yen and New Zealand Dollar. The latter fell to a two-month low of $0.5737 during Asian trading, while the Yen weakened to a one-week low of 155.43 per Dollar.
Markets are pricing in roughly a 90% probability of a 25-basis-point rate hike, suggesting the Dollar could see a modest lift if the Federal Reserve raises interest rates.
There is a limited risk of a Dollar pullback if the Fed hikes but Chair Kevin Warsh uses his press conference to signal that further increases are unlikely. However, if the Fed leaves rates unchanged, the Dollar could fall sharply, with a decline of more than 1% possible, Reuters reports.
At $1.1545, the Euro remained close to Monday’s one-month low of $1.1523, while Sterling, at $1.3478, was only slightly above the six-week trough of $1.3464 reached at the start of the week.
The Bank of England is widely expected to keep interest rates unchanged at its meeting on Thursday.
The Australian Dollar was broadly steady at $0.7129.
Currency markets have remained relatively subdued even as global bond yields have risen together in recent weeks. This is because government bond markets have largely moved in tandem, leaving yield differentials between countries broadly unchanged.
However, the Dollar has gained momentum over the past few sessions as traders increasingly bet that, despite President Donald Trump appointing Kevin Warsh with a mandate to lower interest rates, the Federal Reserve may still need to raise rates several times to demonstrate its commitment to controlling inflation fuelled by the Iran war and the resulting surge in energy prices.
Most of the exceptions to the broader stability in foreign exchange have been concentrated in Asia, while the Federal Reserve’s decision is also expected to be a key driver for the Yen.
The Yen is enjoying its strongest rally in months, driven by growing expectations for a more hawkish stance on Japanese interest rates, reported joint intervention by Japan and the United States, and speculation that Japanese investors could bring funds back home.
Markets are pricing in an 80% probability that the Bank of Japan will raise rates on Friday, according to LSEG data, while traders are also factoring in two 25-basis-point increases by the end of January.