A rate hike race has begun among the world’s central banks – who will be the first to drive their economy into recession. Treasury curve inversion deepens
EUR/USD chart in 5 minute intervals
The dollar resumed its steady gains on Thursday, helped both by expectations of a faster tightening by the Federal Reserve and an influx of funds into safe havens amid growing recession fears.
The dollar set new 24-year highs above 138 yen and returned to parity with the euro after briefly breaking this level yesterday.
The Australian dollar also rose after strong employment data spurred speculation of a significant rate hike by the Reserve Bank.
The Singapore dollar and the Philippine peso rose against their US counterpart after their respective monetary authorities surprised with policy tightening at an unscheduled meeting.
The US dollar rose 0.6% to 138.235 yen after hitting 138.28 for the first time since September 1998.
The euro weakened 0.34% to $1.0024. It hit $0.9998 on Wednesday for the first time since December 2002.
Overnight US consumer price data showed that inflation, already at four-decade highs, accelerated even further.
„The bottom line is that inflation is on the rise in the US,” Commonwealth Bank of Australia analyst Christina Clifton wrote in a note to clients.
„Stubbornly high inflation increases the risk that the FOMC will continue to aggressively raise rates and trigger a recession,” she said. „We expect recession worries to continue to support the US dollar.”
Traders upped their bets that the US central bank could raise rates by 100 basis points at its July 26-27 meeting. A rise of at least 75 basis points is considered almost inevitable.
Atlanta Fed President Rafael Bostic added weight to the speculation, saying higher-than-expected inflation puts a full point increase at stake.
Later, the Bank of Canada surprised the markets with its interest rate decision, further fueling Fed rate expectations.
The dollar was flat at CAD 1.29805 on Thursday after losing 0.32% overnight.
The US currency fell 0.5% to $1.3969 after the Singapore Monetary Authority tightened policy Thursday at an unscheduled meeting to combat rising inflation.
The dollar lost 0.37% to PHP56.08 as the central bank surprised with a 75 basis point rate hike.
The Australian dollar rose 0.21% to $0.67725, reversing earlier losses after data on Thursday showed the unemployment rate fell to a 48-year low.
The pound fell 0.29% to $1.1860, returning to a two-year low of $1.18075 hit earlier this week. He got a bit of a breather yesterday after data showed that the British economy unexpectedly expanded in May.
European currency
After spending several days at parity against the dollar, the euro finally broke through a key level – to the palpable relief of traders (and financial journalists) who couldn’t take their eyes off the euro’s chart.
Talk about whether it has already reached parity and what that psychological milestone means has intensified. And with the euro already down nearly 12% this year, a lot of the bad news has already been factored in.
But let’s face it, milestones matter: The last time the euro traded below $1 was two decades ago, and politicians are probably taking notice.
Note that the momentum for the latest decline came after data showed US consumer prices rose 9.1% in June. This appears to reinforce the case for an excessive 100bp Fed rate hike. this month. more
The Bank of Canada has already paved the way – on Wednesday it raised rates by 100 basis points for the first time among advanced economies in the current tightening cycle.
Expectations of an even sharper US rate hike, which could drastically slow economic growth, have further pushed the US yield curve to invert. The 2-10 yield curve is in its most inverted state at any point in this cycle, according to Deutsche Bank.
So while the euro could hold around $1 at European open, the scope for aggressive US rate hikes versus modest ECB hikes suggest the outlook for the currency remains bleak.
The ECB is likely to start its rate hike cycle with a 25 basis point hike next week and its room for maneuver is already limited given concerns that an energy price shock raises recession risks for the eurozone.
Speculation about a sharp increase in the US rate at the Fed meeting in late July, meanwhile, keeps world stock indices in the red zone.
Asian stocks were anchored at two-year lows, while European and US stock futures were pointing lower.