Dollar jumps to 20-year high as data supports aggressive Fed

© Reuters. FILE PHOTO: Japanese yen and U.S. dollar banknotes are seen with a currency exchange rate graph in this illustration picture taken June 16, 2022. REUTERS/Florence Lo/Illustration

By John McCrank

NEW YORK (Reuters) -The dollar index hit a 20-year high on Thursday, and notched a 24-year peak against the rate-sensitive Japanese yen, after U.S. data showed a resiliently strong economy, giving the Federal Reserve more room to aggressively raise interest rates to curb inflation.

The U.S. currency strengthened after a government report showed that the number of Americans filing new claims for unemployment benefits declined further last week, consistent with strong demand for workers and tight labor market conditions.

The report also showed that layoffs dropped in August, despite hefty interest rate increases from the Fed to quell inflation, which have raised the risk of a recession.

Data from the Institute for Supply Management (ISM) showed U.S. manufacturing grew steadily in August as employment and new orders rebounded, while a further easing in price pressures strengthened expectations that inflation has likely peaked.

"We’ve got stocks hitting new lows here and yields higher and that may reflect the data to some extent because there are no signs of a meaningful slowdown in these numbers," Shaun Osborne, chief FX strategist at Scotiabank, said following the ISM data.

"That may tilt expectation toward a slightly more hawkish Fed."

The U.S. dollar index, which measures the greenback against a basket of six currencies, was up 0.873% at 109.81, at 10:45 a.m. Eastern time (1445 GMT), its highest since June 2002.

"Even after hitting fresh records, USD strength has scope to extend somewhat further, boosted by the global slowdown and the European energy crunch in particular," said analysts at Generali (BIT:GASI) Insurance Asset Management.

Expectations for a third straight 75-basis-point U.S. rate hike at next month's Fed meeting are rising on the back of solid economic data, with Fed funds futures last pointing to around a 77.1% chance of such an increase.

This helped push the yield on benchmark 10-year U.S. Treasuries to a more than two-month high of 3.26.

All eyes will now be on the U.S. non-farm payrolls for August due on Friday.

The euro slid 1.24%, falling back below parity against the dollar to $0.9931, while the British pound hit a fresh two-and-a-half year low of $1.1522 and was last down around 0.86%, as the safe-haven dollar was also supported by moves away from riskier assets.

Manufacturing activity across the euro zone shrank for a second month in August, according to a survey, mirroring a slump in factory activity around the world, and while European energy costs have softened slightly this week, they remain at highly elevated levels.

The Japanese yen slid to as low as 140.225 yen per dollar, its softest since 1998. The dollar was last up 0.71% at 139.94 yen.

"The main driver remains rate differentials between Japan and the U.S., and even today's price action just follows the overnight move higher in U.S. rates. We think the path ahead is going to depend on how U.S. rates behave," said Sosuke Nakamura, a strategist at JPMorgan (NYSE:JPM) in Tokyo.

The risk-sensitive Australian and New Zealand dollars also sold off as part of the move towards safe haven assets and hit their lowest levels since July.

The Aussie was last down 0.77% at $0.67905, and the Kiwi was 0.78% lower at $0.6072.

Bitcoin which, too, trades in line with risk sentiment, was slightly softer, trading slightly under $20,000.