The dollar bounced from two-week lows on Wednesday as benchmark 10-year Treasury yields rose to 14-year highs, while sterling weakened after hotter-than-expected UK consumer price inflation fueled concerns about a deeper recession.
The greenback hit a 32-year peak against the yen, approaching the 150 level at which some traders think the Bank of Japan and the Ministry of Finance might intervene.
Treasury yields resumed their march higher as investors maintained expectations that the Federal Reserve will continue to aggressively raise interest rates to bring down soaring inflation, boosting demand for the U.S. currency.
The U.S. central bank is expected to lift rates by another 75 basis points when it meets on November 1-2, with an additional 50 or 75 basis point increase also likely in December.
It is “still very much premature to try to fade the dollar,” said Mazen Issa, senior foreign exchange strategist at TD Securities. It will likely continue to gain until momentum in core inflation moderates and the Fed pivots to a less hawkish stance, and “neither is likely in the short term”.
Fed Bank of Minneapolis President Neel Kashkari said on Wednesday that job market demand remained strong and underlying inflation pressures probably had not peaked yet.
The Fed’s Beige Book on Wednesday showed that U.S. economic activity expanded modestly in recent weeks, although it was flat in some regions and declined in a couple of others, in a report that showed firms growing more pessimistic about the outlook.
The dollar index gained 0.88% against a basket of major currencies to 112.92. The euro fell 0.95% to $0.9771.
The British pound fell 1.02% to $1.1210 after data showed that Britain’s annual consumer price inflation inched up to 10.1% in September, rising more than expected and returning to a 40-year high hit in July.
“The outlook for the UK economy remains relatively murky, with ballooning borrowing costs, soaring consumer prices, and a government in chaos with its credibility shot to bits unlikely to inspire much confidence,” said Matthew Ryan, head of the market strategy at Ebury.
Investors expect sterling to remain under pressure amid an outlook for rising inflation and a recession in Britain which could lead the Bank of England to increase rates by 75 basis points rather than 100 bps at its November meeting.
While interest rate hikes would normally boost a currency, in the case of the United Kingdom the focus is on the degree to which they will harm the already precarious economy.
“The economy is going to suffer and so that means that the currency is going to have to be the release valve to reflect that shift in the outlook on the macro side,” said Issa.
Traders are on high alert for Japan’s finance ministry and the central bank to step into the market again, as the currency pair pushes toward the key psychological barrier at 150. A cross of 145 a month ago spurred the first yen-buying intervention since 1998 to prop up the currency.
Japanese Finance Minister Shunichi Suzuki said on Wednesday that he was checking currency rates “meticulously” and with more frequency, local media reported.
The BOJ remains an outlier among a global wave of central banks tightening monetary policy to combat soaring inflation, as it focuses on underpinning a fragile economy.