Dollar bides time ahead of expected US Federal Reserve hike

On September 16, the US dollar remained steady near multi-week highs as traders anticipate an interest rate hike from the Federal Reserve. The dollar has gained ground this week, along with yield and energy prices, showing the steepest increase against the yen and the New Zealand dollar. The yen reached a one-week low of 155.49 per dollar during the Asian trading session.

Analysts believe that Federal Reserve policymakers will raise their benchmark interest rate by a quarter of a percentage point, bringing it to a 3.75 to 4 percent range, and signal further hikes ahead. Kirstine Kundby-Nielsen, a senior FX analyst at Danske Bank, stated that while the hike is close to being fully priced, a possible dollar strength could occur if rates are indeed increased.

The euro was nearly at its one-month low of US$1.1523, while the pound was at US$1.3470 after British inflation surged to a five-month high in August. The day before, the Bank of England was expected to keep rates steady.

The dollar index, which measures the currency against major peers, remained stagnant at 99.67. Currency markets have been relatively calm in recent weeks, with global bond yields climbing as sovereign bonds moved in unison, causing minimal shifts in relative differences between countries' yields.

However, the dollar experienced a boost in the last few sessions due to expectations that even if President Donald Trump's Fed chair pick, Kevin Warsh, is inclined to cut interest rates, he must first raise them a few times to prove the Fed's commitment to tackling inflation driven by the Iran war and the resulting rise in energy prices. If Warsh does not vote for a hike, it could lead to a setback for the dollar, according to Kundby-Nielsen.

The yen has been experiencing its most promising rally in months, driven by a more hawkish outlook for Japanese interest rates, potential joint intervention by Japan and the US, and speculation about Japanese investors repatriating capital. Traders estimate an 80% chance that the Bank of Japan will raise rates on Friday, with two 25-basis-point hikes anticipated by the end of January.

Julius Baer economist David A Meier noted that the yen's path will continue to depend heavily on interest rate disparities. He revised the USD/JPY forecasts to 155, expressing some skepticism that the central bank can adequately tighten policy at the pace currently priced in by markets.

In China, the renminbi's long rally has lost momentum, trading around 6.71 to the dollar, but the currency is maintaining its gains despite a widening gap between low Chinese yields and rates elsewhere.