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Dollar strengthens as traders anticipate a sharp rise in rates

The dollar rose against other major currencies on Monday as traders weighed the prospect of strong interest rate hikes in the US and heightened recession risk in Europe.

The dollar index, which tracks the US currency against six other currencies and is heavily weighted in euro terms, rose 0.7 percent to its highest level since 2002. That rally helped propel the euro. roughly on par with the greenback, with the euro’s single currency depreciating. up to 0.9% to $1.0094 – closes above a level unseen for almost two decades.

The dollar also hit a 24-year high against the Japanese dollar saddlebuy ¥ 137.27.

Market sentiment in recent weeks has fluctuated between the view that central banks need to raise rates aggressively to combat soaring inflation and the more forward-looking view that excessive monetary tightening could caused a global recession.

Both stories underpin investors’ appreciation for the dollar, especially since recession risks are seen as higher in Europe. The European Central Bank has closely followed the US Federal Reserve’s tightening of monetary policy, but is expected to remain as dovish as possible to counter economic shocks from Russia’s invasion of Ukraine. .

“We are expecting an earlier recession in Europe,” said Sonja Laud, chief investment officer at Legal & General Investment Management. “The US is an energy exporter, Europe is an importer, and in the current energy price landscape that makes all the difference.”

As Russia shut down the Nord Stream 1 gas pipeline for 10 days of scheduled maintenance on Monday, ING strategists noted that “many are concerned Russia could seize the opportunity to stop or significantly cut back.” exports”, “a blow to the region’s economic prospects”.

Futures linked to TTF, Europe’s wholesale gas contract, rose 0.1% to €170/megawatt hour on Monday, remaining more than double their levels at the beginning of June.

Surprise follow-up Strong employment data for June, analysts expect the Fed to raise rates by as much as 0.75 percentage points at the July meeting to fix inflationaryfollowing a similar move last month.

Futures markets expect the US fund rate to peak at 3.54% in March, while the ECB is expected to push borrowing costs up gradually, from minus 0.5% currently. at just over 1% in February.

Meanwhile, the Bank of Japan has defied the global trend towards tighter monetary policy. On Monday, BoJ Governor Haruhiko Kuroda warned of “very high uncertainty” for the domestic economy with a strong signal that the central bank will keep its easing stance.

On the stock market, the Stoxx Europe 600 index lost 0.3% and Germany’s Xetra Dax fell 0.8%, followed closely. fell hard in China spurred by new Covid-19 restrictions.

Futures markets indicate that Wall Street’s S&P 500 stock index, which rallied last week after its worst first half in more than five decades, will lose 0.5% by the New York open. .

Hong Kong’s Hang Seng stock index fell 2.8% and mainland China’s CSI 300 fell 1.7% after cities across China re-imposed coronavirus restrictions to combat the pandemic. Sub Omicron BA.5 is very contagious.

Yields on the 10-year German currency, which fell as the price of the eurozone’s benchmark debt instrument rose, fell 0.05 percentage points to 1.29%.

Yields on 10-year US Treasuries, the worldwide basis for debt valuation, traded 0.04 percentage points lower at 3.06%.

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