Dollar hits highest level in a year as traders anticipate rising U.S. interest rates

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The US dollar traded at its highest level in a year against major currencies on Thursday, with traders betting on persistent inflation, bringing the Federal Reserve closer to its first pandemic-era interest rate hike .

The dollar index, which measures the US currency against six others including the euro and the pound sterling, hit its highest level since September 28, 2020, after days of choppy trading in financial markets after central bank officials signaled the end of ultra-supportive monetary policies.

Headline inflation in the United States peaks around 13 years after economies reopened after shutdowns last year, creating bottlenecks in the supply chain.

The Fed raised its inflation forecast last week and said it would cut its $ 120 billion in monthly bond purchases that boosted lending and spending during the pandemic. He said half of his policymakers now expected interest rates to rise next year.

Fed Chairman Jay Powell, who for much of this year called price pressures transient, warned on Wednesday that “frustrating” inflationary pressures would persist.

“We are seeing persistent and widespread inflation in the United States and Europe,” said Tatjana Greil Castro, co-head of public markets at bond investor Muzinich.

Powell has now “prepared the market” for the Fed to reduce its bond purchases from November, which “leaves open the possibility that the first rate hike will be pronounced in the second half of next year.” said Lee Hardman, currency analyst at MUFG Bank. .

The income yield on the 10-year US Treasury benchmark bond, which informs valuations that investors are willing to pay for higher risk stocks, was flat at 1.527% on Thursday, but fell from around 1 , 3% a little over a week ago.

“It will easily reach 2% or even a little more” by the end of the year, said Greil Castro, as investors adjusted the income they sought for fixed-interest securities based on bets on the fixed-interest securities. interest rate and inflation.

The US stock markets, which suffered their worst day of losses on Tuesday since May, were on course to end September in the red. The S&P 500 Index was down 0.5% Thursday at noon in New York City, down 4% for the month and heading for its first monthly loss since January.

The tech-rich Nasdaq Composite traded flat, bringing its monthly performance to a loss of 4.4%.

The European market for the Stoxx 600 index ended September down 3.2%, after rising 0.2% on Thursday, although some investors said they remained bullish.

“We remain in the buy-down camp,” said Marija Veitmane, equity strategist at State Street Global Markets, referring to the practice of supplementing stocks of strong companies during times of stock market volatility.

Companies in the United States and Europe, having benefited from cheap money during the pandemic, were now “inundated with cash” and able to invest in their businesses, which was “exciting for long-term profitability”. Veitmane said.

Shaniel Ramjee, chief investment officer at Pictet, said rising bond yields “would push a market rotation” that would favor stocks in the banking and energy sectors whose dividend yields were high enough to remain attractive relative to government bonds. Treasure.

Brent crude, the international benchmark for oil, was flat at $ 78.57 a barrel after crossing the $ 80 mark for the first time in nearly three years earlier this week.

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