Dollar bides time ahead of expected US Federal Reserve hike

The US dollar maintained its position near multi-week peak levels on Wednesday (Sep 16) as traders anticipate the Federal Reserve's upcoming decision, likely marking the first in a series of potential US interest-rate hikes. Over the past week, the dollar experienced a notable rally, outperforming the yen and New Zealand dollar.

During Asian trading hours, the yen plummeted to a one-week low of 155.49 per dollar. Analysts are broadly anticipating a quarter percentage point rate increase by the Federal Reserve, bringing the benchmark rate to a 3.75 to 4 percent range, with further tightening expected. Danske Bank's senior FX analyst Kirstine Kundby-Nielsen commented, "Even though a hike is near, we may witness some dollar strength if they raise interest rates."

The euro approached Monday's one-month low of US$1.1523, while the British pound found solace at US$1.3470, following a surge in British inflation to a five-month high in August. The dollar index, which gauges the dollar against major currencies, remained unchanged at 99.67. Market sentiment has been relatively subdued in recent weeks, despite global bond yields surging due to their convergence, limiting differential changes across countries.

However, the dollar gained momentum in the recent sessions, fueled by the belief that even if the Fed chairman Kevin Warsh, appointed by US President Donald Trump, tends to cut rates, he must first raise them a few times to demonstrate the Fed's commitment to controlling inflation driven by the Iran conflict and the ensuing energy price surge.

If President Warsh does not vote in favor of a hike, it could potentially weaken the dollar. The yen has been experiencing a significant rally, driven by a more hawkish outlook on Japanese interest rates, possible joint intervention between Japan and the US, and speculation of Japanese investors repatriating capital. Traders believe there is an 80 percent chance the Bank of Japan will hike rates on Friday and have priced in two 25-basis-point hikes by the end of January.

A recent research note by Julius Baer economist David A. Meier expressed skepticism about the Bank of Japan's ability to sustain the pace of tightening currently expected in the markets. The Chinese renminbi's prolonged rally has slowed to around 6.71 to the dollar; however, it has maintained its gains despite a widening disparity between low Chinese yields and rates elsewhere.