The dollar held just below a 20-year high against a basket of currencies on Monday before an expected Federal Reserve rate hike this week, with traders focusing on the potential for the US Federal Reserve to adopt an even more hawkish tone than many expect.
The Fed has taken an increasingly aggressive approach to monetary policy as it tackles inflation, which is soaring at the fastest pace in 40 years. It is expected to raise interest rates by 50 basis points and announce plans to reduce its $ 9 trillion balance sheet by the end of its two-day meeting on Wednesday.
Although the chances are seen as low, some investors are looking for the possibility of an increase of 75 basis points or a faster pace in balance sheet reduction than currently expected.
“Many traders expect the Fed not to withdraw from this hawkish stance, and you can still see some hawkish surprises, which is why the dollar is likely to hold on to its gains on the way into the meeting,” Edward Moya said. senior analyst at OANDA in New York.
Comments from Fed Chairman Jerome Powell at the close of the meeting will also be examined for new indications as to whether the Fed will continue to raise interest rates to combat rising price pressures, even if the economy weakens.
U.S. manufacturing activity grew at the slowest pace in more than a year and a half in April due to an increase in the number of workers quitting their jobs and manufacturers becoming more concerned about supply.
The dollar was last at 103.72 against a basket of currencies, after reaching 103.93 on Thursday, the highest since December 2002.
The euro was at $ 1.0493, after falling to $ 1.0470 on Thursday, the lowest since January 2017.
The single currency was hit after data showed growth in eurozone output stalled last month as factories struggled to procure raw materials while demand took a hit from steep price increases.
It has suffered from concerns about inflation, growth and energy security as a result of sanctions imposed on Russia following its invasion of Ukraine.
Concerns about global growth have also boosted demand for the dollar as China shuts down cities in an effort to curb the spread of COVID-19. Authorities in Shanghai on Monday reported 58 new cases outside areas under strict closure, while Beijing pressed to test millions of people.
China’s manufacturing activity fell at a slower pace in April as shutdowns halted industrial production and disrupted supply chains, raising fears of a sharp second-quarter economic downturn that will weigh on global growth.
The dollar rose 0.6% against the Chinese yuan in offshore markets, reaching 6.6820, just below the 6.6940 touched on Friday, the highest since November 2020.
The Japanese yen held just above 20-year lows against the dollar on Thursday as the Bank of Japan strengthened its commitment to keep interest rates ultra-low by promising to buy unlimited amounts of bonds daily to defend its yield target.
The Japanese currency was last at 130.14, after reaching 131.24 on Thursday, the weakest since April 2002.