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Published 23.06.2023 01:12
© Reuters.
The US Dollar Gains Ground as Central Banks Adopt More Aggressive Tightening Measures
Investing.com – The US dollar is making significant gains at the beginning of Friday’s trading session in Europe. This surge is attributed to several central banks, including the Bank of England, implementing more aggressive tightening policies, which has led to a risk-averse sentiment among investors.
By 08:00 AM ET (0800 GMT), the US Dollar Index, which measures the currency against a basket of six other major currencies, had risen by 0.3% to 102.280, just above its recent one-month lows.
The Pound Suffers Following the Bank of England’s Sharp Rate Hike
The GBP/USD pair is down 0.3% to the 1.2706 level after initially surging in response to the Bank of England’s unexpected 50 basis point rate hike announcement on Thursday. This increase pushed the pair to nearly a year-high before the subsequent decline.
“Sterling rose initially after the higher-than-expected rate hike, only to fall again, presumably on the view that the Bank of England is willing to plan for a further slowdown to control inflation. One could argue that, as a growth-sensitive currency, this is all bad news for the pound,” noted analysts from ING in a research note.
While higher interest rates typically support currencies, concerns about a potential UK recession have weighed on the pound and prompted some investors to seek safe-haven assets such as the US dollar.
Further evidence of the economic slowdown in the UK was revealed in the early Friday data, which showed a 2.1% year-on-year decline in sales for May.
Powell Hints at More Rate Hikes
During his two-day appearance before Congress, Federal Reserve Chairman Jerome Powell reiterated his belief that US prices could rise by at least twice the current rate to combat soaring inflation.
“We don’t want to do more than is necessary,” Powell stated during his testimony before the Senate Banking Committee on Thursday. “The overwhelming majority of the Federal Open Market Committee members do believe that more rate hikes are coming, but we want to carry them out at a pace that allows us to assess incoming information.”
In addition to his comments, Powell also announced a 25 and 50 basis point interest rate hike, signaling the likelihood of further increases.
The Euro Falls as Investors Await PMI Data
The EUR/USD pair is down 0.3% to the 1.0930 level as investors await the release of regional surveys. While a slowdown in activity is expected, strong numbers could potentially harm the euro by suggesting a rise in interest rates in a region that experienced a recession in the first quarter of the year.
Meanwhile, the AUD/USD pair, which is highly sensitive to risk, fell by 0.9% to the 0.6694 level, while the USD/JPY pair rose by 0.2% to 143.37. This is despite Japan’s core inflation reaching a 42-year high in May, indicating that inflationary pressures remain strong in the country.
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The article highlights that the strength of the dollar is attributable to both central bank aggressiveness and increased risk aversion. This demonstrates the importance of understanding global market dynamics and the impact they have on currency strength.
“The strong dollar continues to thrive due to the combination of central bank aggressiveness and increased risk aversion. Investors seek the stability of the greenback amidst global uncertainty, making it a safe haven for their investments.”