Dollar rises to two-decade high as interest rates rise; Euro struggles

US dollar banknotes are shown in front of the stock chart displayed in this illustration taken on February 8, 2021. REUTERS/Dado Ruvic/Illustration

LONDON (Reuters) – The dollar surged to a two-decade high on Monday as a combination of rising US Treasury yields and a tight shutdown in China boosted the greenback’s safe-haven appeal.

Against a basket of major currencies, the dollar crossed 104.19 for the first time since July 2002, extending its rally nearly 9% this year.

The dollar’s rally was underpinned by a relentless rally higher in US Treasury yields. On Monday, yields on the benchmark 10-year bond hit 3.18% for the first time since November 2018. It has doubled over the past two months.

“It is difficult to miss the current momentum of higher yields and the strength of the US dollar in the near term,” Mizuho strategists said in a daily note.

Although the peak of US interest rates in the current hiking cycle is seen at around 3.5% in mid-2023, the speed of the Fed rate hike cycle is much greater than that of its Bank of England and European Central Bank counterparts.

This is evident in the Eurozone where recent hawkish comments by policy makers have prompted investors to start re-pricing interest rate expectations even though expected interest rate increases in Europe will delay the US by a large margin.

Money markets expect the US to raise interest rates by another 200 basis points over the remainder of the year, raising benchmark rates to nearly 3%, while an expected 92 basis points hike by the European Central Bank will take the benchmark rate back. On the deposit to the positive zone.

The Fed raised its benchmark funds rate by 50 basis points last week, and strong jobs data has boosted bets for more big hikes, with a focus on Wednesday’s inflation numbers as the next risk for an upward surprise.

The Australian dollar, which is sensitive to growth by 1%, fell to $0.6999, its lowest level since February. The British pound and the New Zealand dollar reached 22-month lows, while the euro and the yen were just above recent major declines.

Cryptocurrencies were battered in a rush from risky assets and bitcoin was posting losses over the weekend and near year lows at $33,500 while ether, which was down 4% on Sunday, was at $2,440.

(Sikat Chatterjee report). Additional reporting by Tom Westbrook in Singapore. Editing by Kirsten Donovan

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