US dollar hits 20-year high as risk aversion dominates

The US dollar was higher on Monday after reaching a twenty-year high as risk-off sentiment stemming in part from concerns over the Federal Reserve’s ability to combat high inflation boosted the greenback’s appeal.

The dollar has risen for five straight weeks as U.S. Treasury yields have climbed on expectations the Fed will be aggressive in attempting to tamp down inflation.

On Monday, Minneapolis Fed President Neel Kashkari said the U.S. central bank may not get as much aid from easing supply chains as it is hoping for in helping to cool inflation. Atlanta Fed President Raphael Bostic said the Fed can hold to half-percentage-point interest rate hikes for the next two to three policy meetings and then assess the response of inflation and the economy.

“I was waiting for more pushback from the Fed to say they are not on that preset course of half-point increases and it just goes to show you right now, the dollar, it is benefiting from that interest rate differential trade which seems like it is only going to get wider over these next several months,” said Edward Moya, senior market analyst at Oanda in New York.

“Also there is a tremendous amount of worry on Wall Street and you are seeing safe-haven flows continue to come towards the dollar.”

The dollar index rose 0.087% at 103.860 after touching 104.19, its highest level since December 2002, with the euro down 0.18% to $1.0532.

The Fed last week raised rates by 50 basis points as it seeks to lower inflation without tilting the economy into a recession, while a solid jobs report on Friday cemented expectations for more rate hikes. Investors will get a look at more inflation readings later this week in the form of the consumer price and producer prices indexes.

Yields on most U.S. Treasury notes pared early gains to trade lower on Monday as bargain-hunters stepped in after the benchmark 10-year yield hit fresh 3-1/2-year highs as inflation fears continued to roil markets.

On Wall Street, stocks were trading sharply lower, with the S&P 500 (.SPX) index down more than 2% as growth stocks were again pulled lower by climbing Treasury yields. Also contributing to the defensive tone was the ongoing war in Ukraine and concerns about rising COVID-19 cases in China. read more

Markets are completely pricing in a rate hike of at least 50 basis points by the Fed at its June meeting, according to CME Group’s FedWatch Tool.

The Japanese yen strengthened 0.22% versus the greenback at 130.30 per dollar, while Sterling was last trading at $1.2307, down 0.24% on the day.

In cryptocurrencies, Bitcoin last fell 9.77% to $32,539.67.

Ethereum , last fell 11.52% to $2,393.36.

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