The dollar rose to its highest level in almost two months versus major peers on Thursday after the Federal Reserve unexpectedly brought forward its projections for interest rate hikes into 2023.
The dollar index =USD, which tracks the currency against six rivals, rose to as high as 91.484 in Asia for the first time since April 19, following a nearly 1% surge overnight, the biggest gain since March of last year.
Only New Zealand’s kiwi NZD=D3 made any meaningful headway against the dollar among major currencies on Thursday, climbing 0.6% after data showed New Zealand’s economy grew much faster than expected in the first quarter. The kiwi had tumbled more than 1% on Wednesday.
The Federal Reserve on Wednesday began closing the door on its pandemic-driven monetary policy as officials projected an accelerated timetable for interest rate increases, opened talks on how to end crisis-era bond-buying, and said the 15-month-old health emergency was no longer a core constraint on U.S. commerce.
A majority of 11 Fed officials pencilled in at least two quarter-point interest rate increases for 2023, even as they pledged in their statement to keep policy supportive for now to encourage an labour market recovery.
The projections also showed higher forecasts for inflation this year, though the price increases were still described as “transitory.” Overall economic growth is expected to hit 7%.
“The Fed’s super hawkish pivot should reinforce the lows and offer further near-term USD support,” TD Securities analysts wrote in a research note.
“A double-whammy of higher rates and wobbly risk sentiment would result in a positioning squeeze and the start of a new narrative,” possibly resulting in a 2% dollar rally through the summer, the note said.
The benchmark 10-year Treasury yield US10YT=RR was at 1.5890% in Asia, after rallying to as high as 1.5940% from as low as 1.4820% on Wednesday.
The dollar climbed to an almost two-month high of $1.1984 per euro EUR=D3 on Thursday, extending its gain of about 1% from the previous session.
It strengthened to as high as 110.825 yen JPY=EBS, a level not seen since April 1, adding to a 0.6% rally overnight.
The Australian dollar AUD=D3 dipped to $0.75975, the lowest since April 13, before trading 0.3% higher to recoup some of Wednesday’s 1% tumble.
Sterling GBP=D3 slipped to the lowest since May 7 at $1.39745, and the Canadian dollar CAD=D3 hit the weakest since May 5 at C$1.2292, before trading little changed in the Asian afternoon.
“The USD is in a much healthier place now that the Fed is inching toward the exits,” Westpac analysts wrote in a client note, predicting the dollar index would test 92 in coming days.
“The Fed’s pivot will likely make for a challenging backdrop for risky assets, and there’s enhanced prospects for more interest rate support for the USD, all of which spells good news for the currency.”
Cryptocurrencies were also hurt by the dollar’s strength, with bitcoin BTC=BTSP hovering around $39,000 following a 4.5% slide on Wednesday, and ether ETH=BTSP at $2,438 after a 7% selloff.