Dollar advances to one-year high; U.S. debt ceiling impact muted

Key Points
  • The dollar index rose for the fourth consecutive day, to 94.112, its highest since early November last year.
  • The euro fell below the $1.16 level, the lowest since late July 2020.
In this photo illustration, US 100 dollar bills seen on an American flag.
Igor Golovniov | SOPA Images | LightRocket | Getty Images

The dollar surged on Wednesday to a one-year high against major currencies, boosted by increased expectations for a reduction in the U.S. Federal Reserve's asset purchases starting in November and an interest rate hike, possibly in late 2022.

The greenback also fared well despite an impasse in Washington over the U.S. debt ceiling that threatened to plunge the government into a shutdown.

The world's largest reserve currency, seen as a safe-haven bet at times of market stress, has strengthened in recent days as investors instead focused on fears of a global slowdown, a rise in energy prices and higher U.S. Treasury yields.

Traders are also concerned the Fed will start to withdraw policy support just as global growth slows.

"Fed has sounded the starting gun on monetary policy normalization," wrote Kit Juckes, macro strategist, at Societe Generale in his latest research note.

"As the U.S. escapes the interest rate zero-bound, leaving the Eurozone and Japan behind, the global savings glut is set to be drawn towards the dollar, which can outperform the majority of other currencies in the coming year, and may start its move earlier than we expected," he added.

The dollar index - which measures the U.S. currency against a basket of six major currencies - rose for the fourth consecutive day, to 94.112, its highest since early November last year. It was last up 0.4% at 94.115.

Erik Nelson, macro strategist at Wells Fargo in New York, sees a further 2% to 3% upside in the dollar index.

The greenback was also unfazed, even as U.S. Senate Republicans on Tuesday blocked a bid by President Joe Biden's Democrats to head off a potentially crippling U.S. credit default, with federal funding due to expire on Thursday and borrowing authority on around Oct. 18. 

The Senate could vote on Wednesday or Thursday on a bipartisan resolution to fund federal operations through early December, Senate Democratic Leader Chuck Schumer said. 

The euro was among the currencies to lose ground, falling below the $1.16 level , the lowest since late July 2020. It last traded down 0.7% at $1.1596.

The yen showed little reaction to the election of Fumio Kishida as leader of Japan's ruling Liberal Democratic Party, which put him on course to become the country's next prime minister. 

The yen, the currency most sensitive to U.S. yields as higher rates can attract flows from Japan, touched an 18-month low against a resurgent dollar. The dollar climbed as high as 112.04, its strongest level since late February last year, and was last up 0.4% at 111.99 yen.

Currency traders also took note of comments from major central bankers on Wednesday, who were panelists at a European Central Bank forum in Sintra, Portugal.

Fed Chairman Jerome Powell, European Central Bank President Christine Lagarde and Bank of England Governor Andrew Bailey said they were keeping a close eye on inflation amid a surge in energy prices and the persistence of production bottlenecks.