On Thursday, the US dollar trimmed its gains after two officials of the Federal Reserve indicated that they were in favor of an interest rate hike of 75 basis points at the July meeting of the US central bank. This reduced the odds of a more aggressive move that was being anticipated after the release of the US inflation data.
CPI data
Bets of the US Fed hiking up interest rates even more aggressively have gone up after the US annual consumer price data on Wednesday showed that there was a 9.1% increase recorded in June, which is the biggest increase seen in over four decades.
However, the odds of an increase of 100 basis points declined, after Christopher Weller, the Governor of the Fed, said that he was in support of another 75 basis points increase later this month at the policy meeting of the central bank.
He added that he would lean towards a bigger hike only if data shows that there is not a substantial reduction in demand for bringing down inflation. James Bullard, the President of St. Louis Fed, also added that he wanted interest rates to be hiked by 75 basis points at the meeting of the central bank this month.
Currency impact
There is now a 31% possibility of a hike of 100 basis points as per Fed funds futures, which is a reduction from 70% predicted earlier. The chances of a 75 basis point increase stand at 69%. There was a 0.22% increase in the US dollar index, which measures the currency against major peers, as it reached 108.50, which is its highest level since September 2002.
There was a decline in the euro to $1.0031 after it fell to as low as 99.52 cents, which is its lowest value since December 2002. It is expected that the US dollar will continue to rise, as the prospects of higher interest rates give it support, while other central banks are slower in their rate hikes like the European Central Bank (ECB).
Market analysts said that Europe would have a harder time and the Fed is likely to get more aggressive with interest rate differential becoming quite powerful over the next year.
Volatile trading
On Thursday, trading in the markets remained quite volatile, as the euro came down to 20-year lows. A party in the coalition government of Prime Minister Mario Draghi in Italy did not support a parliamentary confidence vote, which included measures for dealing with the cost of living crisis. This prompted the Italian premier to resign later.
There was also a jump in the US dollar to a high of 24 years against the Japanese yen, as the country’s central bank continues to stick to its dovish stance, which is in contrast with the hawkish one of other central banks.
Market analysts said that markets were giving preference to the US dollar on a broad scale, considering the ongoing geopolitical uncertainty, the expectations of interest rate hikes in the US, and the energy crisis in Europe.
