The dollar index extended Wednesday gains to make a new 20-year high at 111.72 during the Asia session
The dollar surged to a fresh two-decade high and Asian stocks hit a two-year low on Thursday after the Federal Reserve sharply hiked U.S. interest rates and projected raising them further and faster than investors had expected in order to tame inflation.
The median of Fed officials’ outlook, which has U.S. rates at 4.4% by year’s end and staying high in 2023, seemed to spook even hawkishly positioned rates and currency markets and quickly extinguished relief that Wednesday’s hike had not been larger.
The dollar index, a measure of the greenback against a basket of majors, extended Wednesday gains to make a new 20-year high at 111.72 during the Asia session.
The euro sank to a 20-year low of $0.9807 as Russia mobilised reservist troops for war in Ukraine. The yen briefly hit a 24-year trough when Japanese policymakers unanimously stuck with ultra-easy settings, as expected.
Gold fell 1%. Sterling, the Aussie, kiwi, loonie, Singapore dollar and yuan all made milestone lows. S&P 500 futures fell 0.6% and European futures dropped 2%.
The Fed is not going to stop any time soon and there’s going to be an extended period of restrictive monetary policy for at least the next year or so, said Sally Auld, chief investment officer at wealth manager JB Were in Sydney.
What else do you buy except for the U.S. dollar at the moment? she added, citing growth clouds over Europe, Britain and China and yen weakness as Japan holds interest rates low.
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1.4% to its lowest since May 2020. Japan’s Nikkei fell 0.8% and touched a two-month low.
The U.S. yield curve deepened its inversion as investors priced out the chance of a ‘soft’ economic landing and braced for damage to longer-run growth.
The two-year yield rose to as high as 4.1320% in Asia while the 10-year yield held at 3.5416%.
The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer, Fed Chair Jerome Powell told reporters after the rate hike announcement.
