Dollar gains with Fed expected to remain hawkish

© Reuters. FILE PHOTO: U.S. Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

By Karen Brettell

NEW YORK (Reuters) - The dollar gained against a basket of currencies on Wednesday, holding near a 20-year high as investors waited for a Friday speech by the Federal Reserve Chairman for fresh clues on how aggressive the central bank will be in its battle against inflation.

Investors have pared back expectations that the Fed could tilt to a slower pace of rate hikes as inflation remains at 8.5% on an annual basis, well above the Fed's 2% target.

The focus of Jerome Powell's speech in Jackson Hole will be on to what extent an economic slowdown might alter the Fed’s pace of tightening, or if the need to tame inflation pressures will override other economic factors.

The dollar gained even after data on Wednesday showed that new orders for U.S.-made capital goods increased at a slower pace in July from the prior month, suggesting that business spending on equipment could struggle to rebound after contracting in the second quarter.

"The dollar's still well bid and I think that the market's concluding that these data are not going to change the Fed's position about what's going to happen next month," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

"While the market might be swinging back and forth between inflation and recession, the central banks aren't. They are focused, it seems to be nearly exclusively, on inflation," Chandler said.

Fed funds futures traders are pricing in a 59% chance that the Fed will hike rates by another 75 basis points at its September meeting, and a 41% probability of a 50 basis points increase.

The dollar index was last up 0.42% at 108.99, holding just below a 20-year high of 109.29 reached on July 14. The euro was down 0.49% at $0.9919, after hitting a 20-year low of $0.99005 on Tuesday.

The greenback dipped on Tuesday after data showed U.S. private sector activity was weaker than expected in August while sales of new U.S. single-family homes plunged to a 6-1/2-year low in July.

The euro has been hurt by growth concerns as the region faces an energy crisis. Front-month Dutch gas, the benchmark for Europe, rose again on Wednesday as the prospect of a halt to Russian gas supplies through the main Nord Stream 1 pipeline for three days kept investors on edge.

"The sharp jump in gas prices and the uncertainty about this going forward will continue to weigh on the euro for the time being," said DNB Markets FX analyst Ingvild Borgen Gjerd.

Meanwhile, cyclical currencies such as the Australian and New Zealand dollars were under pressure from fears of a global growth slowdown.

The Aussie fell 0.62% to $0.6886 and the kiwi slumped 0.72% to $0.6169.

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Currency bid prices at 9:43AM (1343 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 108.9900 108.5500 +0.42% 13.931% +109.0500 +108.4900

Euro/Dollar $0.9919 $0.9967 -0.49% -12.76% +$0.9972 +$0.9916

Dollar/Yen 137.0500 136.7500 +0.22% +19.05% +137.1450 +136.1750

Euro/Yen 135.95 136.31 -0.26% +4.32% +136.3800 +135.5300

Dollar/Swiss 0.9678 0.9641 +0.37% +6.08% +0.9682 +0.9608

Sterling/Dollar $1.1766 $1.1834 -0.57% -13.00% +$1.1837 +$1.1757

Dollar/Canadian 1.3010 1.2959 +0.42% +2.93% +1.3018 +1.2954

Aussie/Dollar $0.6886 $0.6929 -0.62% -5.27% +$0.6932 +$0.6880

Euro/Swiss 0.9598 0.9607 -0.09% -7.44% +0.9614 +0.9559

Euro/Sterling 0.8427 0.8422 +0.06% +0.32% +0.8439 +0.8409

NZ $0.6169 $0.6213 -0.72% -9.88% +$0.6218 +$0.6164

Dollar/Dollar

Dollar/Norway 9.7095 9.7180 -0.03% +10.28% +9.7495 +9.6730

Euro/Norway 9.6305 9.6825 -0.54% -3.79% +9.6997 +9.6099

Dollar/Sweden 10.6585 10.6242 -0.19% +18.20% +10.6821 +10.6083

Euro/Sweden 10.5739 10.5941 -0.19% +3.32% +10.6155 +10.5743