US Dollar Aggressively Bullish Ahead of US Fed Policy Meeting

The dollar (USD) maintained a firm position near a two-decade high against most of its counterparts on Tuesday, as money markets brace for another aggressive interest rate hike by the US Federal Reserve tomorrow.

The US Dollar Index (DXY), which tracks the performance of the greenback against six other major currencies, currently trades up at 0.27% or 109.88 and has remained relatively stable since its return to the 110.00 area.

The two-year US Treasury yields also extended some support to the dollar, rising as high as 3.970% for the first time since November 2007 in an overnight burst.

Investors have priced in a 100% chance of another 75 basis point rate hike by the FOMC in its meeting tomorrow and a 29% chance for a 1% rate hike.

US Dollar on a Resumption Momentum Against Yen as BoJ Keeps Rates Lose

The greenback gained over 0.36% against the Japanese yen (JPY) on Tuesday, with the USD/JPY pair resuming a bullish momentum after a few days of consolidation. The USD/JPY pair is believed by many to track the long-term yield difference between the US and Japanese government bonds. This comes ahead of the Bank of Japan (BoJ)’s policy meeting on Thursday, where the bank is widely expected to retain its ultra-dovish policy outlook, including restricting the 10-year yield near the zero mark, to cushion the fragile economy.

This expected move by the BoJ comes despite recent data showing that core consumer inflation jumped to an eight-year high of 2.8% last month, which has exceeded the bank’s 2% target for the fifth consecutive month. Commenting on the topic, Tohru Sasaki, a strategist at JP Morgan in Tokyo, narrated: “CPI was very strong but the BOJ will likely keep policy unchanged, so expectations about Fed policy are more important.” Sasaki added:

“Dollar-yen will eventually break above 145, but the speed depends on how hawkish the Fed is and developments in interest rate differentials.”