Dollar near one year high, Fed tightening in focus

The dollar hovered near a one-year high versus major peers, following a two-day surge. This is in the middle of expectations for a tapering of Federal Reserve stimulus from November and a possible interest rate hike in late 2022. The safe-haven greenback also saw a bid on worries the Fed could start to tighten into a period of slowing global growth. Perversely they did well amidst an impasse in Washington over the U.S. debt ceiling.

The dollar index that measures the currency against a basket of six rivals, stood at 94.336. The dollar bought 111.86 yen, easing slightly after reaching 112.05 overnight. The euro was little changed at $1.1602. Chris Weston is the head of research at brokerage Pepperstone in Melbourne. He wrote in a client note that King USD is in the house: it doesn’t matter the currency, just buy USDs has been the vibe. They are effectively seeing both the left and right side of the USD ‘smile’ theory. This is working with stagflation concerns. Weston said that Fed has made it clear that it will taper from November. The smile theory postulates that the dollar does well in good times or bad times for the U.S. economy, but not in between.

Speaking at a European Central Bank forum, Fed Chair Jerome Powell, ECB President Christine Lagarde and Bank of England Governor Andrew Bailey said that they were keeping a close eye on inflation. This is even amidst the surge in energy prices and the persistence of production bottlenecks. U.S. Senate Republicans had blocked a bid by President Joe Biden’s Democrats to head off a potentially crippling U.S. credit default. Sterling edged up 0.1%. The Australian dollar rose 0.15%.