Tapering Sentiments Boost U.S Dollar To A Month High

A fragile mood started off the week with the greenback strong on the first trading session, while worries about a financial catastrophe at indebted developer China Evergrande further contributed to weakness.

The euro fell slightly to $1.1721 in thin trading due to the holiday season in Japan and China, marking its weakest week in a month.

There is a bit of support for safe haven currency from the expectation of imminent Fed asset purchase cuts in addition to caution as equity markets begin to sway. Everyone is watching for the Fed to signal its tapering intentions.

In order to assess how USD is performing against a basket of currencies used by US trade partners, traders use US Dollar Index, or DXY.

In case of a strengthening dollar against these currencies, the index will rise, whereas a weakening dollar against these currencies will cause it to fall.

A month-high of 93.263 was seen for the U.S. dollar index. Dollar/yen exchanged hands at 110.01.

While traders are mostly focused on the Fed during this week, there are also central bank meetings in Japan, Switzerland, Sweden, Norway, the United Kingdom, Indonesia, the Philippines, Taiwan, Brazil, South Africa, Turkey and Hungary.

Wednesday marked the end of its two-day meeting, and markets expect that the Fed will continue with its extensive plans to taper this year but won’t provide specifics for at least a month.

However, the rate rise in the 10-year Treasury yield for the fourth week in a row last week suggests either a hawkish surprise is coming, or that inflation expectations could shift to showing hikes as soon as 2022, both of which would help the dollar.

Changing just two Fed members’ minds would translate into median projections reflecting a hike next year in the “dot plot”.

Some market pundits predict there will be at least one interest rate rise next year after forecasting no changes in interest rates this year. In addition, two hikes are now anticipated for 2023 – that number could easily rise to three as well.

With the exception of the Bank of England, other major central banks are expected to leave policy settings unchanged, but traders see potential gains in the currency if the central bank adopts a more hawkish tone or more members call for a tapering of asset purchases.