The dollar rose on Wednesday, September 21 to its highest level against the euro for almost twenty years after the announcement of a rate hike by the American central bank (Fed), which combined with statements by the Russian president. Vladimir Poutine. Shortly after 6:00 p.m. GMT, the greenback reached 0.9814 dollars for one euro, for the first time since the end of October 2002, just a few months after the official changeover to the single currency. The ‘greenback’, one of many nicknames for the dollar, also had a record high against the pound sterling since March 1985 at $1.1238 to the pound.
The Fed raised its key rate by 0.75 percentage points on Wednesday, bringing it within a range of 3% to 3.25%. The announcement by the Federal Reserve came on top of statements by Russian President Vladimir Putin, who earlier announced the “partial” mobilization of some 300,000 Russian reservists and referred to the use of nuclear weapons to “protect Russia. “. These comments came the day after the announcement on Tuesday of the urgent holding of a “referendum” on annexation by Russia in four regions of Ukraine.
The general feeling that the conflict was escalating had already undermined all European currencies, first and foremost the euro, before the Fed dealt them another blow. “Concerns over a potential escalation of the war in Ukraine, with the mobilization of hundreds of thousands of Russian reservists, are sending investors to safe havens”, including the dollar, summarizes Susannah Streeter, analyst at Hargreaves Lansdown.
Bank of England under pressure
“The 0.75 percentage point rise didn’t really weigh” on the market, DailyFX’s Christopher Vecchio said of the Fed’s communication. The “catalyst” of this new boost of the dollar was rather, according to him, the updating of the projections of the members of the Fed in terms of the evolution of the key rate. “The Fed is telling us that rates are going to reach between 4.4% and 4.9% in 2023, which is more than what the market had priced in”, namely around 4.5% at the peak of the monetary tightening cycle , explained Christopher Vecchio.
In addition, central bankers ruled out any rate cut before 2024, which took currency traders by surprise, who were betting on the second half of 2023. Fed Chairman Jerome Powell thus warned of the risks that could be posed by “premature easing of monetary policy”. The Dollar Index, an index that compares the dollar to several major currencies, was propelled Wednesday to a peak of more than 20 years (June 2002). The Fed’s frenzied pace is putting pressure on all major central banks, including the Bank of England (BoE), which will release its monetary policy decision on Thursday.
While most economists have so far expected a half-point hike in the BoE’s key rate, the assumption of a 0.75 point hike, in line with that of the Fed, has gained momentum. the last days. “Downside risks are limited for the dollar with the Fed still pricing in a more than one point rate hike by the end of the year,” Convera’s Joe Manimbo commented in a note. However, Christopher Vecchio does not expect the “buck”, another nickname for the dollar, to go much further in the coming hours. The Fed “has been more aggressive, but only marginally,” he said. “Market expectations weren’t that far off from what we were told” by the US central bank on Wednesday.