Key facts
- The dollar traded near multi-week highs before a Federal Reserve decision.
- Traders anticipate the Fed will raise interest rates by 25 basis points, with a 90% chance priced in.
- The yen hit a one-week low of 155.43 per dollar.
- South Korea's won has risen over 15% against the dollar since late June.
- The Bank of Japan is expected to hike rates on Friday, with two 25-basis-point hikes priced in by January.
The dollar pulled back from near multi-week highs on Wednesday as oil prices stalled ahead of a Federal Reserve decision where traders expect the first of what could be several U.S. interest rate hikes. A 25 basis-point increase is about 90% priced in, implying the dollar will receive a modest boost if the Fed increases, according to Carol Kong, currency strategist at the Commonwealth Bank of Australia in Sydney.
Global stocks declined as U.S. Treasury yields hit a 2007 high and oil stayed above $100, according to previous reports. The dollar had advanced along with yields overnight, running furthest against the yen and New Zealand dollar, leaving the kiwi to hit a two-month low of $0.5749 in Asia morning trade and the yen at a one-week low of 155.43 per dollar.
The euro was at $1.1535, not far from Monday's one-month low of $1.1523, while sterling, at $1.3470, was just above a six-week trough of $1.3464 it had made on Monday. The Aussie dollar steadied at $0.7126.
Currency markets have seen limited movement while global bond yields have been climbing because sovereign bonds have moved in tandem. However, the dollar has gained traction in the last few sessions on the thinking that despite being hired by President Donald Trump to cut interest rates, Fed Chair Kevin Warsh will need to hike a few times to show the Fed is serious about taming inflation, which is being fanned by war with Iran and the resulting energy price surge. Calvin Tse, head of U.S. strategy and economics at BNP Paribas, expressed skepticism that one or two hikes would be enough to restore the Fed's credibility.
The yen is in the midst of its most promising rally for months on a combination of a hawkish shift in expectations for Japanese interest rates, joint intervention by Japan and the U.S., and talk of Japanese investors repatriating capital. Traders see an 80% chance the Bank of Japan hikes rates on Friday, according to LSEG data, and have priced in two 25-basis-point hikes by the end of January. David A. Meier, economist at Julius Baer, noted that the yen's path will depend heavily on interest rate differentials and revised USD/JPY forecasts to 155, reflecting skepticism about the central bank's ability to satisfy the pace of tightening priced in by markets.
South Korea's won, which has risen more than 15% against the dollar since the end of June, and China's yuan are other regional standouts. The yuan's rally has lost momentum at around 6.71 to the dollar, but it is holding its gains despite the widening gap between low Chinese yields and rates elsewhere.