The Dollar Slipped

The dollar slipped off one-month highs on Thursday as the Federal Reserve signaled that interest rates raised next year. A rise in global market sentiment prompted traders to sell the currency.

The Fed kicked off a week of central bank meetings. Norway should become the first developed country to hike interest rates since the epidemic. The Fed, too, struck a hawkish tone, laying the framework for the Fed to begin reducing bond purchases in November and at a faster pace than economists expected.

Nine of the United States’ 18 policymakers predicted that borrowing costs would need to rise next year, prompting markets to push back the timing of the first-rate hike. The dollar and bond yields, on the other hand, fell. Many observers believe that the Fed left some policy wiggle room to slow down if necessary. There was also considerable calm on the Chinese front, even though Evergrande, the bankrupt developer, is unlikely to fulfill a bond coupon due on Thursday.

The dollar’s rise on Friday and Monday was primarily due to risk aversion. The Fed raised its median forecast for 2023 slightly. The dollar is doing well, said Peter Kinsella, head of FX strategy at asset manager UBP.

The Fed Statement

Following the Fed statement, the spread between five-year notes and 30-year bonds fell below 100 basis points, the smallest since July 2020, while the 2-year/10-year curve has flattened by more than 50 basis points since end-March. 

The euro was trading a month high of $1.1716. The sterling was also stronger ahead of a Bank of England meeting that should be hawkish. The Norwegian crown didn’t change against the dollar. It went up 0.2 percent versus the euro ahead of a central bank meeting at which interest rates could rise. In the last month, the Norwegian crown has gained around 5% against the US dollar. It is close to a three-month high against the euro, but economists believe significant increases are unlikely. “Long crown posture has been significantly increased in recent weeks. Hence, the hurdle for a bullish crown reaction is pretty high,” RBC analyst Adam Cole told clients.

Cole stated that the Norges Bank has already signaled the prospect of a second rate hike this year so that markets would be more focused on revised forward guidance.

Earlier in Asia, moves were muted. Japan is on vacation and the yuan is slipping to one-month lows against the dollar. However, the Australian dollar rose 0.3 percent against the US dollar to $0.7261, aided by a solid set of “flash” PMI numbers.

The IHS Markit Purchasing Managers Index (PMI) for Australia was 57.3, up from 52 in August and assuaging concerns about the impact of COVID-related lockdowns.