The dollar index rose to its highest level since July 29 on Monday, extending a weekly gain after the Federal Reserve's latest rate hike. The euro slipped after far-right gains in German state elections, while the yen extended losses after the Bank of Japan's own rate increase.
The U.S. dollar index, which tracks the greenback against six major peers, added 0.2% to 100.43 at 16:58 ET, its highest level since July 29. The move extends a solid weekly gain that followed the first Fed interest rate hike in over three years.
Dollar buoyed by hawkish Fed
The Federal Open Market Committee unanimously voted to raise the federal funds rate to 3.75%-4.00% from 3.50%-3.75%. According to Investing.com, Fed Chair Kevin Warsh told reporters last week: "The plain fact is that inflation is too high and has been for too long."
The Fed's updated Summary of Economic Projections showed at least 12 members of the FOMC saw one more rate hike this year. Odds of the hike had surged to 90% ahead of the FOMC's decision, boosted by spiking oil prices, U.S. economic data, and a rout in the bond market. Higher rate environments tend to strengthen the dollar, but Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management, warned that rate hikes have a delayed and uneven impact on the economy and raise the risk of over-tightening.
Euro absorbs German political setback
The euro shed 0.2% to $1.1463 as European trading desks processed weekend voting projections showing the far-right Alternative for Germany party securing first place in northeastern state elections. The result deals a direct blow to Chancellor Friedrich Merz's mainstream conservative coalition.
Deutsche Bank's Jim Reid said the immediate market implication is not a change in national policy but a further weakening of Germany's political centre, adding that the forces driving political polarization across Europe remain alive and well. As a result, continental bourses face fresh political risk premia heading into the new week.
Yen slips following BoJ hike, rate check
The Japanese yen weakened on Monday, extending last week's 2% slide that pushed the currency to multi-week lows after the Bank of Japan's rate decision. The USD/JPY pair rose 0.3% to 157.36.
Japanese markets were closed Monday for a national holiday, and the resulting thin liquidity kept global trading desks on alert for official intervention. Nikkei reported Friday that the BoJ had conducted market "rate checks," calling foreign exchange desks to inquire about executable quotes — a process traders view as a precursor to direct currency intervention. The BoJ raised borrowing costs to a 31-year high of 1.25% on Friday, but two dovish dissenting votes and Governor Kazuo Ueda's emphasis on preemptive calibration triggered a "sell the fact" reaction that forced Japanese authorities to drop verbal warnings and rate checks to defend the currency.
Source: Investing.com
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