On Wednesday, jittery financial markets sent the safe-haven greenback to a new two-decade high as increasing global interest rates fueled concerns about an impending recession, while sterling dipped as low as it has ever been due to concerns over Britain’s dramatic tax cut proposals.
In trading in Asia, the U.S. dollar index versus a basket of key currencies increased by approximately 0.5% to reach a new high of 114.70.
The benchmark 10-year Treasury yields in the United States reached 4% for the first attempt since 2010, peaking at 4.004%, which coincided with the dollar’s unrelenting ascent. The rates on two-year bonds were 4.2891%.
According to Moh Siong Sim, a currency analyst at the Bank of Singapore, it’s a mixture of the spillover out from the UK, where gilt yields have skyrocketed. There has been some ricocheting into certain DM bond markets as a result of that.
And of course, all of this is happening while the Fed has made it clear that it will stop at nothing to reduce inflation, he continued.
The Federal Reserve has taken the lead in the fight against rising inflation around the world, recently becoming even more aggressive by indicating additional significant rate rises on top of super-sized movements in previous months.
Charles Evans, president of the Chicago Federal Reserve, James Bullard, president of the St. Louis Federal Reserve, and Neel Kashkari, president of the Minneapolis Federal Reserve Bank, all reaffirmed that message overnight. Evans stated that the central bank will be required to raise interest rates to a scope between 4.50% and 4.75%.
Increased concerns of a global recession brought on by increased borrowing costs have contributed to an increase in bond yields globally.
Once more under attack, the pound fell 0.95% to $1.06345, undoing a slight 0.4% gain the day before.
After plummeting to a record trough of $1.0327 at the beginning of the week, it is still suffering significant losses although holding close to the $1.1300 level prior to last week’s UK budget.
Huw Pill, the chief economist at the Bank of England, predicted over the weekend that the institution will respond to Kwasi Kwarteng’s proposed large tax cuts with a “strong policy response.”
To put an end to market rumours of a probable interest rate increase in between meetings, he stressed that the central bank wishes to hold off until its upcoming meeting in November.
Carol Kong, a senior associate for the international economics & currency strategies at the Commonwealth Bank of Australia, said the sterling may continue to be fairly weak in the foreseeable future.
Essentially, it’s a confidence issue. Kong said that the UK government, not the Bank of England, would be responsible for finding a solution.
On Wednesday, the strengthening dollar drove other currencies to a multi-year low, with the Australian dollar sliding 0.8% to reach $0.6381, its lowest level since May 2020. To $0.55645, the kiwi fell by almost 1%, matching its lowest level from March 2020.
The lowest rate since such information became available in 2011 was reached by the Chinese offshore yuan, which dropped as low as 7.2350 to the dollar.
A source said Chinese monetary officials are requesting local banks to use a yuan fixing mechanism they abandoned two years ago to guide and protect the fast-depreciating currency.
This information was made public late on Tuesday.
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