Dhe renewed increase in key interest rates by 0.75 percentage points by the American central bank gave the dollar further impetus. The dollar index, which tracks rates against major currencies, rose to 111.79 points on Thursday, a 20-year high. At the beginning of 2002, the index was at more than 120 points. This had been the most recent surge in the world’s most important currency, which began in 1995 and ended in 2002. The dollar’s highest level since the collapse of the Bretton Woods system of fixed exchange rates in the 1970s was more than 165 points in the mid-1980s.
Conversely, the euro fell to $0.981, its lowest level since October 2002. The British pound fell to $1.1221, a 37-year low against the dollar.
“What else can you buy right now but the dollar,” rhetorically asked Sally Auld, chief investor at wealth manager JB Were. “The Fed will not stop raising interest rates in the foreseeable future.” The central bank had made this clear the previous evening. Other stockbrokers also point to the attractiveness of the dollar as a “safe haven” against the background of the looming recession in Europe, the weakening Chinese economy and the ongoing war in Ukraine. The dollar is the only game in town, according to TD Securities.
Nevertheless, some market participants see a tense situation with regard to several technical indicators. The Fed’s aggressive tightening has propelled the dollar into the final stages of a rapid rally that could end in a dramatic and volatile manner, warns Gary Dugan, head of the Global CIO Office. The accelerated tightening means the dollar’s rally has entered its final phase, he told Bloomberg. However, this does not rule out the risk that this phase could be volatile and dramatic. The path to a weaker dollar remains “difficult”.
In addition, the European Central Bank (ECB) has gradually tightened its stance. ECB Director Isabel Schnabel said in an interview with “t-online” published on Thursday that she does not expect the high inflation in the euro area to fall quickly, regardless of the interest rate hikes. Even in the event that a downturn dampens inflation, the ECB would have to raise interest rates further given the very low starting level – even if there is currently no evidence of a wage-price spiral.
Dax opens at a discount
The run on the dollar has also strengthened its use as a global currency against the euro. The proportion of euro payments made in euros fell to 34.5 percent in August. That was a full percentage point down from July, Bloomberg reported, citing SWIFT data. Dollar payments accounted for 42.6 percent. The spread between the two currencies has widened from just over 1 percentage point in February to over 8 percentage points in August.
As expected, the German stock market opened on Thursday with significant discounts. After a slight recovery, the market-wide FAZ index was more than 1 percent down at 2012 points, the Dax fell by a similar amount to 12,634 points.
According to observers, it is slowly dawning on equity investors that fighting inflation is going to be economically painful. The S&P 500 index opened at a premium on Wednesday, gaining as much as 1.3 percent for the day, but then plunged towards the end of the session to finish down 1.7 percent as Federal Reserve Governor Jerome Powell made it clear that the central bank was… Interest rates will continue to rise sharply – until there are signs that the price pressure is easing.
Also impressive was the so-called dot plot, which shows individual Fed officials’ forecasts for future interest rates. Accordingly, the mean value (median) for the key interest rate is 4.6 percent in the coming year. In June it was still 3.8 percent. Interest rates could gradually fall in 2024 and 2025, but monetary policy will then remain restrictive.
The Fed has three conditions for a slower pace of rate hikes, Powell said: continued below-trend growth, a slowdown in the labor market, and “compelling evidence” that inflation is moving towards 2 percent. Unicredit believes these conditions are unlikely to materialize before the end of this year or early next year.
Two-year government bond yields rose to a 25-year high of more than 4 percent, while longer-dated bonds were buoyed by recession speculation.
Investors now have to grapple with the risk of interest rates rising more than previously expected, G Squared Private Wealth’s Victoria Greene told Bloomberg. At the same time, bargain hunters may find solace in the idea that the Fed will end its rate hikes sooner than expected. The market seems torn between the prospect of higher interest rates at the end of the year and the hope of an early exit, they say.
