The Dollar Rises to a New 5-Week High Ahead of Jackson Hole on the Fed's Hawkish Tack

After another Federal Reserve member signaled the probability of sustained aggressive monetary tightening on Monday, the U.S. dollar index jumped to a new five-week high before the Fed's critical Jackson Hole symposium this week.

After Russia said that it might cut off European gas supplies through the Nord Stream 1 pipeline for three days at the end of this month, worsening the region's energy crisis, the euro dropped to its lowest level in five weeks.

The Chinese central bank slashed key lending rates, the latest in a series of monetary easing measures meant to shore up an economy suffering from COVID-19 crackdowns and a property crisis, which caused the yuan to fall to its lowest level in over two years.

Last up 0.074% at 108.23, the U.S. dollar index rose to 108.26 for the first time since July 15 versus a basket of six rival currencies that includes the euro.

This comes after a week in which the market rose 2.33 percent, its largest weekly rise since April 2020 and against the backdrop of repeated calls from Fed policymakers for additional action to curb inflation that has persisted for decades.

On Friday, Thomas Barkin, president of the Richmond Federal Reserve, stated that central bankers had a "urge" to raise interest rates more quickly and more frequently in the near future.

Ahead of the Jackson Hole meeting in August, "Fed speakers have been reinforcing the idea that further rate hikes are likely given that the fight against inflation has not yet been won," causing widespread market anxiety.

25-27, according to Rodrigo Catril, senior FX analyst at National Australia Bank, because of rising expectations for Fed Chair Jerome Powell to highlight that tightening is "still a long way from the end."

Based on current market pricing, there is a 47.5% chance of a massive 75 basis point rate hike on September 21 and a 52.5% possibility of a half-point hike.

With recession chances rising, economists polled by Reuters tend to favor a 50 basis point hike.

Yields on benchmark 10-year U.S. Treasuries climbed above 3% in Tokyo trading on Monday, the first time this has happened since July 21.

The dollar reached its highest level against the yen since July 27th, at 137.40 yen. The yen is highly sensitive to changes in U.S. yields.

After the People's Bank of China cut the prime rates for one and five year loans, as expected, the dollar surged in onshore trading, reaching a high of 6.8308 yuan for the first time since September 2020.

After lowering borrowing costs unexpectedly the week prior, that was to be expected.

The dollar's value against the offshore yuan rose to 6.8520, its highest level against that currency since September 2020.

Similarly, the Euro fell to $1.0026, its lowest level since July 15th, before recovering to close down 0.13 percent at $1.0027.

The British pound dropped 0.23 percent against the dollar, reaching a low of $1.1805; this is the lowest level since the beginning of the five-week period on Friday, when it reached $1.17925.