U.S. dollar seesaws as markets price in hefty Fed rate hike

Key Points
  • The dollar traded within narrow ranges against major currencies on Monday, ahead of a slew of central bank meetings this week
  • The Fed is likely to deliver another hefty interest rate hike.
A man exchanges US dollar bills at exchange office.
Muhammed Semih Ugurlu | Anadolu Agency | Getty Images

The dollar rose against major currencies on Monday, trading within narrow ranges, ahead of a slew of central bank meetings this week led by the Federal Reserve, which is likely to raise interest rates by another 75 basis points (bps).

Volume was light overall, with markets in London and Tokyo closed for public holidays.

World stock markets remained on edge, however, and the dollar maintained its firm tone, given expectations that the Fed would maintain its aggressive tightening path until next year to contain stubbornly high inflation.

Fed funds futures have priced in a 81% chance of a 75 bps rate hike this week and a 19% probability of a 100-increase at the conclusion of the U.S. central bank's two-day policy meeting, according to Refinitiv data The dollar index, which measures the currency against six counterparts, was not far from 20-year high of 110.79 hit on Sept. 7 earlier in day, before turning slightly negative, down 0.12% at 109.63.

Since the beginning of the year, the dollar index has surged 14.7%, on track for its best yearly percentage gain in 18 years.

"Generally, the trend is your friend until the bend in the end. The dollar is going to follow that pretty well," said Amo Sahota, executive director, at FX consulting firm Klarity FX in San Francisco.

"Will there be more dollar strength before the FOMC (Federal Open Market Committee)? I think the market is going to pull a little bit here. It will go into a holding pattern and some consolidation," he added.

This week is also smattered with holidays that could thin liquidity and result in sharper price moves, with Japan and Britain off on Monday, Australia on Thursday, and Japan again on Friday, among others.

In other currencies, the euro was little changed against the dollar at $1.0022, sterling rose 0.19% to $1.1434 and within sight of Friday's 37-year low of $1.13510, while the New Zealand dollar fell 0.68% to US$0.5956.

Earlier in the session, the New Zealand unit fell to its lowest since May 2020 of US$0.5933

The Canadian dollar fell to its lowest in almost two years to C$1.3354 per U.S. dollar. The U.S. dollar last changed hands at $1.3254, nearly flat on the day.

Against the yen, the dollar rose 0.24% to $143.25, hovering beneath a strong resistance level at 145 that has been reinforced by Japanese policymakers' toughened talk of currency intervention.

The Bank of Japan is widely expected to stick with massive stimulus at its meeting on Wednesday and Thursday, keeping its ultra-loose policy in place. But a turning point in Japanese monetary policy may come sooner than has been thought, with the central bank recently dropping the word "temporary" for its description of elevated inflation.

China's yuan ended at a fresh 26-month low on Monday and traded below the psychologically critical 7-per-dollar level. In offshore trade, the yuan was 0.36% weaker.

Bitcoin, the biggest cryptocurrency by market value, fell to a three-month low below $19,000, as unease over rising interest rates globally knocked risk assets. It was last down 0.2% at $19,381.

Ether, the cryptocurrency used in the Ethereum blockchain, rallied from a two-month low against the dollar and was last 1.4% higher at $1,358.60.

Ethereum went through a major software upgrade last week that alters the way ether tokens are created, drastically reducing its energy usage.