Dollar heads for its best week in nine months

The dollar was headed for its best week since last September, while gold was on course for its worst in 15 months, after US central bank officials brought forward their projections for the first post-pandemic interest rate rise.

The dollar index, which measures the greenback against big currencies, traded flat on Friday but has gained 1.5 per cent over the week in response to Federal Reserve policymakers’ projections on Wednesday that interest rates would rise from record low levels in 2023, from an earlier forecast of 2024.

Gold, which often moves inversely to the dollar because the metal is priced in the US currency, traded at $1.791 an ounce on Friday — a decline of more than 4 per cent from the start of the week and its largest weekly fall since March 2020.

The price of Brent crude, the international oil benchmark that is traded in dollars, also fell for a second day on Friday, losing 0.5 per cent to $72.69 a barrel.

“Because of the hawkish surprise of rate rise expectations having been brought forward, you’ve seen a pretty aggressive move in the dollar,” said Keith Balmer, multi-asset portfolio manager at BMO Global Asset Management. “Most of the market was bearish on the dollar ahead of this meeting,” he said, as traders anticipated the Fed keeping monetary policy ultra-loose, “but it is now less likely to weaken.”

Line chart of Dollar index  showing Bearish calls on dollar hit by rate rise forecasts

While the Fed on Wednesday also upgraded its economic growth and inflation forecasts for the US, equity and bond markets traded calmly on Friday as investors viewed the earlier than expected rate rise as a signal that the central bank was willing to step in to control runaway price rises.

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The Stoxx Europe 600 index fell 0.4 per cent but still remained close to its June 15 closing record. The UK’s FTSE 100 index lost 0.8 per cent, dragged lower by energy stocks.

Futures markets signalled Wall Street’s S&P 500 share index would trade flat at the New York opening bell, pinned close to its June 14 all-time high, while the tech-heavy Nasdaq 100 would gain 0.2 per cent.

The yield on the benchmark 10-year US Treasury bond, which moves inversely to its price, was 0.02 percentage points lower at 1.487 per cent as traders bought the debt.

This yield has climbed from about 0.9 per cent at the start of the year but moderated in recent months as investors decided a 5 per cent leap in headline US inflation for the 12 months to May would either not be repeated or would be controlled by the central bank. Persistent inflation erodes the returns on fixed interest securities such as government bonds.

“The bond market narrative has been changing on a whim quite often,” said Tatjana Greil-Castro, co-head of public markets at credit investor Muzinich. “First we had this idea [coming out of the Covid-19 crisis] that inflation will be permanently high. Then the story was that this was the top and [inflation] would be going down, and I think the story keeps changing because we just don’t know yet.”

The US rate rise forecast, added Deutsche Bank strategist Jim Reid, “marked another vote of confidence that the Fed would prove able to keep [price] pressures contained”.

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Elsewhere in markets, the euro was up 0.1 per cent against the dollar at $1.191 but has lost about 1.6 per cent against its US counterpart this week. Sterling fell 0.1 per cent to $1.390.



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