The U.S. dollar strengthened on Thursday as investors were looking at signs of the Federal Reserve’s future monetary policy.
On Wednesday, the dollar index rose by 0.32 percent, reaching 106.55. It still traded below the 107.34 level reached on October 3, the highest since November 2022.
The currency saw gains due to the anticipation that the Fed would maintain high interest rates for an extended period while working to bring inflation closer to its two percent annual target.
Fed Governor Christopher Waller previously said the Fed would not likely raise interest rates at its next meeting, but asserting the need to “wait, watch and see.” In contrast, New York Fed President John Williams said that interest rates would need to remain high to bring inflation back to the mandated rate.
With investors divided on what to expect from the Fed, they now look to Fed Chair Jerome Powell’s comments on Thursday. This will be his last comment before Fed officials enter a blackout period ahead of the central bank’s October 31-November 1 meeting.
“I think it’s highly likely the Fed Chair will reinforce the more cautious commentary heard from Fed speakers over the past week and a half,” said IG Market Analyst Tony Sycamore.
The greenback also found backing in a surge of U.S. Treasury yields overnight. This gain was due to mounting concerns regarding government debt issuance amid the ongoing discussions about interest rates.
Since mid-July, the 10-year Treasury yield benchmark has surged by approximately 120 basis points, and the dollar index has risen roughly seven percent.
Fed funds futures currently indicate a 39 percent probability of a rate hike by the end of the year, with just a six percent likelihood of an increase next month.
Yen declines against dollar
The yen depreciated against the greenback, reaching a two-week low of 149.89. On Thursday morning in the Asian market, it managed a marginal recovery, edging up to 149.77 but remaining close to the 150-level.
The 150-yen mark has become psychological due to past government interventions to support the currency when it approached this level. The yen saw a strong rally in early October after dropping below 150, though it later retraced. There were suspicions of intervention from Tokyo, but early signs indicate Japan refrained from intervening.
The potential for the dollar/yen to rise further depends on the U.S. yields compared to their Japanese counterpart’s pace, as outlined in a note by Carol Kong, a currency strategist and economist at the Commonwealth Bank of Australia.
Japanese 10-year government bond yields reached a new high for the decade at 0.815 percent. This development led to the Bank of Japan’s announcement of a $2 billion emergency bond purchase aimed at averting a further increase in yields.
Meanwhile, the euro dipped 0.38 percent to $1.0536. However, it was up from its lowest level since December 2022 at $1.044, reached on October 3.
The British pound experienced a decline after a brief pop as British consumer price inflation (CPI) unexpectedly remained at 6.7 percent in September. This rate continues to be the highest among major advanced economies, raising the potential for another interest rate hike. As a result, the pound last recorded a 0.32 percent drop, settling at $1.2144.
The Australian dollar declined due to underwhelming domestic employment data, dropping to as low as $0.6296 against the U.S. dollar. It was last seen at $0.63015. The employment growth in September fell short of expectations, in contrast to the remarkable outcome of the previous month.