US dollar extends gains ahead of key rate decisions

The US dollar continued to rise on Monday and stocks fell as investors awaited a shift in key central bank rate decisions that are expected to lead to additional monetary policy tightening. by the Federal Reserve and the Bank of England.

The dollar rose 0.3% against a basket of other currencies, expanding increased sharply in recent months that has been driven by rising US interest rates.

Expectations of another rate hike when the Fed meets later this week have dragged global stock markets lower. Before the start of trading on Wall Street, futures that track the broad S&P 500 index were down nearly 1%, while the Stoxx 600 across the eurozone was down 0.8%.

Monday’s dismal performance came after the MSCI broad index of developed and emerging market shares fell 4% last week in its biggest weekly drop since June. Concerns about the health of the global economy and the specter of even larger rate hikes from major central banks have spooked investors.

“This is like a work or break week. Samy Chaar, chief economist at Lombard Odier, said there is still the revaluation anxiety we experienced last week and it makes no sense that sentiment is heading for something. better.

The dollar rallied to touch the pound, weakening below $1.14.

“The money market is probably the best summary of how close we are to a breakout point,” Chaar said. “The big question will be whether we get some kind of positive signal from the central banks about when their bull cycle will peak. . . You don’t see many avenues where the Fed can rest easy. “

The consensus expectation on Wall Street is that the Fed will raise rates by 0.75 percentage points at the end of its two-day meeting on Wednesday. Market forecasts for a third straight increase of that magnitude were bolstered last week by data showing US consumer price inflation cooled less than forecast in August.

Pricing based on federal funds futures contracts suggests the Fed will raise its key rate to 4.4% in the first months of 2023, from the current level of 2.25 to 2.5% when Policymakers try to cool down inflation.

Investors are concerned that the central bank’s efforts to reduce inflation by tightening the currency will drag the US economy into recession as debt repayment costs rise for companies and borrowers. individual.

Yields on 10-year US government debt rose above 3.5% for the first time since 2011 as investors sold bonds, another sign of worries about the economy.

In Europe, gas prices fell about 5%, with a decline in economic activity expected to lead to weaker energy demand. The weight of gas kept in stock also increased, reinforcing hopes that a winter energy split could be avoided after Russia drastically reduced gas supplies to the EU.

The Japanese yen fell 0.3 percent to 143 yen against the dollar after last week hit a 24-year low as the government stepped up its verbal intervention to calm the country’s currency markets.

The Bank of Japan will make its latest policy decision on Thursday. Most economists expect the BoJ to keep its policy of keeping 10-year bond yields near zero as it tries to induce longer-term inflation in an economy that has been going for decades. wet price growth.

The BoE is also set to announce its latest rate decision on Thursday, with the City of London analyst consensus forecast suggesting a 0.5 percentage point increase.

Asian shares also fell, with the MSCI index of regional shares down about 0.5%. Stock markets in the UK and Japan were closed for public holidays.

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