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US Dollar: Hawkish Fed supports Dollar against Euro
Confirmed
In Short: The US Dollar strengthened after the Federal Reserve raised interest rates and issued a hawkish outlook, pushing the currency to seven-week highs.
The US Dollar strengthened after the Federal Reserve raised its benchmark interest rate by 25 basis points and issued a hawkish outlook, emphasizing upside inflation risks. This move pushed the Dollar to its highest level since late July.
Markets responded positively to the Fed’s decision, pushing the Dollar higher alongside short-term US Treasury yields. Strong August retail sales data further reinforced the perception of resilient US growth and accommodative monetary policy.
The hawkish stance from the Fed also led to significant increases in US rates across the curve, with 2-year USD swap rates rising 10 basis points and 10-year USD swap rates rising 6 basis points.
The Japanese Yen weakened sharply following the Fed’s move, dropping as much as 1% to 156.42 per dollar. This raised the stakes for the Bank of Japan’s policy meeting scheduled for Friday.
Strategists warned that unless the Bank of Japan convinces markets of more tightening, the Yen could weaken further. Some analysts suggested that the Dollar-Yen pair could reach as high as 159 in the short term, but over the longer term, it may have reached a major top this summer.
Background
Danske Bank A/S is a Danish multinational banking and financial services corporation. Headquartered in Copenhagen, it is the largest bank in Denmark and a major retail bank in the northern European region with over 5 million retail customers.
What's confirmed
- Danske Research Team explains that the Dollar strengthened after the Fed’s unanimous 25bp rate hike and hawkish risk assessment, which emphasized upside inflation risks.
- Markets pushed the Dollar higher alongside short-term US Treasury yields, while strong August retail sales data reinforced the perception of resilient US growth and accommodative monetary policy.
- Similarly, US rates rose significantly across the curve with 2Y USD swap rates rising 10bp and 10Y USD swap rates rising 6bp following the decision." "EUR/USD moved modestly lower, consistent with the hawkish interpretation.
- AUD/USD finds fresh buyers and retakes 0.7100 in the Asian session on Thursday as the US Dollar pauses its hawkish Fed-inspired rally to its highest level since late July.
- However, RBA rate-hike bets and hopes for US-Iran diplomatic efforts lift risk sentiment and support the risk-sensitive Australian Dollar and the major.
- The US Dollar pauses following the post-Fed rally to seven-week highs, while a more hawkish repricing of the BoJ's policy normalization path supports the Japanese Yen.
- The yen’s sharp drop after the Federal Reserve’s hawkish hike is raising the stakes for the Bank of Japan’s policy meeting Friday, with strategists warning the currency could weaken further unless officials convince markets that more tightening is coming.
- The yen weakened as much as 1% overnight to 156.42 per dollar in the wake of the Fed move.
What's still developing
- “Japan is certainly facing an enormous amount of pressure to both hike and deliver a hawkish message to minimise the damage,” said Glenn Yin, director of research at ACCM in Melbourne.
- Still, a rate hike on Friday may not be enough to support the currency, as the central bank “may not adopt a stance as hawkish as the Fed’s, which could serve as an immediate catalyst for yen weakness”, said Akira Moroga, chief market strategist at Aozora Bank.
- Hawkish board member Hajime Takata has even kept the door open for an outsized interest-rate increase or back-to-back hikes.
- The relatively hawkish message helped the US Dollar retain support following the announcement.
- OCBC strategist Christopher Wong notes that the Fed’s 25bp hike and higher dots have extended the US Dollar (USD) rebound, with the US Dollar Index (DXY) around 100.3.
- With the Fed validating a hawkish policy path and front-end yields elevated, the USD may retain moderate support in the near term.
- That said, the softer tone in the US Dollar lends support to the pair’s recovery at the time when market participants continue to digest Wednesday’s hawkish message by the Fed.
- AUD/USD trades with a positive bias for the second straight day, holding above 0.7100 in the Asian session on Friday as softer US bond yields keep US Dollar bulls on the back foot.