Dollar hits 20-year high as Fed flags higher rates for longer period

The U.S dollar surged to a 20-year high against a basket of currencies on Monday after Federal Reserve Chair Jerome Powell signaled interest rates would be kept higher for longer

The U.S dollar surged to a 20-year high against a basket of currencies on Monday after Federal Reserve Chair Jerome Powell signalled interest rates would be kept higher for longer to bring down soaring inflation.

The dollar index scaled to a fresh two-decade peak of 109.44 in the Asia trade, with greenback strength pushing other major currencies to new lows and putting pressure on its emerging markets counterparts.

The dollar hit 138.88 against the Japanese yen, the highest since July 21, while the offshore yuan fell to a fresh two-year low of 6.9321 per dollar.

The moves extended dollar gains made on Friday when Powell warned there'd be "some pain" for households and businesses as it will take time for the Fed to control inflation.

"Powell made it clear that there is no dovish pivot as some market participants had expected," Carol Kong, senior associate for currency strategy and international economics at Commonwealth Bank of Australia.

"I think for this week, the (U.S. dollar index) is going to track even higher towards 110 points, just as market participants continue to price in more aggressive tightening cycles by the major central banks."

The U.S. dollar index last stood at 109.24, within a whisker of the two-decade high of 109.29 it hit in July.

Markets are now pricing in about a 64.5% chance of a 75 basis point rate hike at the next Fed meeting in September.

Despite the potential for a hike that big at the European Central Bank's September policy meeting, the single currency has struggled with investors more focused on an energy crisis in the bloc.

Russian state energy giant Gazprom is expected to halt natural gas supplies to Europe via its main pipeline from Aug. 31 to Sept. 2 for maintenance.

"Fears over a complete shutdown of Russian gas are going to keep euro/dollar heavy and below parity," said CBA's Kong.

The risk-sensitive Australian and New Zealand dollars were likewise weighed down by fear that aggressive rate hikes around the world will put the brakes on economic growth.

The Aussie was down 0.31% to $0.6870, while the kiwi hit a new one-month low of $0.6107 and last traded $0.6113.

 

(Reporting by Rae Wee; Editing by Sam Holmes)