The U.S. dollar strengthened in the Asian market on Friday local time as “hawkish” remarks from global central banks reduced risk appetite among investors.
The DXY, an index that keeps tabs on the dollar’s value against six peers, rose to 102.63 in afternoon trading. The index declined in the previous forex trading session.
Analysts explain that expectations of further rate hikes by the world’s central banks supported the dollar’s gain over other currencies. Higher interest rates increase the risk of an economic downturn, prompting investors to look for safe-haven assets like the U.S. dollar.
“I believe the doom and gloom is back as a dominating narrative across markets now.”
Juan Perez, Monex director of trading
Federal Reserve chairman Jerome Powell told Congress on Thursday that the central bank would manage the benchmark rate at a “careful pace” going forward. The market now predicts a 74 percent chance that the Fed will conduct a 25-basis-point hike next month.
Sterling declined by 0.07 percent to $1.2740. It briefly rose to an almost one-year high after the Bank of England (BoE) delivered its policy decision. The British currency is currently on track to lose more than 0.5 percent this week, breaking a three-consecutive gaining streak.
The BoE increased its key rate by 50 basis points on Thursday, against earlier estimates of a 25-basis-point hike. Wells Fargo international economist Nick Bennenbroek said the BoE’s plan to further hike rates might push the U.K. economy to contract by late 2023. Bennenbroek explained that the BoE needed “clearer signs” of decelerating growth and inflation to end its tightening cycle.
The euro slid 0.04 percent to $1.0950, extending its downward trend. Meanwhile, the Swiss National Bank and Norway’s central bank increased their rates by 25 basis points and 50 basis points, respectively. CMC Markets analyst Tina Teng said Western central banks sent more hawkish signals than previously expected.
Against the Japanese yen, the greenback stood at a seven-month high of 142.90. The Bank of Japan’s (BoJ) insistence on maintaining ultra-low rates as peers keep raising rates is pressuring the yen, say analysts.
New data suggested that core consumer prices in the country had grown more than the two percent target in May. Another report showed that Japan’s manufacturing activity contracted this month.
The Turkish lira also fell to 25.589 per U.S. dollar, a new record low. Turkey’s central bank increased its cash rate by 650 basis points to 15 percent. The lira has experienced market pressures since the re-election of President Tayyip Erdogan, who is known for unconventional financial policies.
The Australian dollar declined by 0.16 percent to $0.6746, after losing almost 0.6 percent the day before. The New Zealand dollar traded 0.05 percent lower at $0.6174. Analysts say both currencies are sensitive to the shift in interest rate expectations.
Updates on yields
U.S. Treasury yields rose in the U.S. market on Thursday after Powell delivered his congressional testimony.
The 10-year Treasury yield increased by 7.6 basis points to 3.798 percent. The two-year yield, which indicates short-term rate expectations, gained 8.4 basis points to 4.790 percent. The yield curve between two- and 10-year notes was inverted at -99.20 basis points. The gap between the two yields was at -101.30 earlier in the day, the steepest since March.
Analysts say the yield curve data indicated the market’s expectations that the Fed would continue raising rates. The data also showed that investors had anticipated a recession in the U.S. Economic data published on Thursday.
Sales of existing homes increased by 0.2 percent to 4.3 million. Home prices, however, declined by 3.1 percent on an annual basis. The number of weekly jobless claims last week also stood near a 20-month high at 264,000.