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Weekly Market Update 2nd October – Dollar extended its rally on higher interest rates prospects

Weekly Market Update 2nd October – Dollar extended its rally on higher interest rates prospects

1. Dollar index extended its rally to trade at around 112 as higher interest rates prospects continue to fuel its strength. Expectations that the Federal Reserve will tighten its monetary policy further to bring inflation back to its 2% target range, alongside a strong domestic US economy amid the global slowdown also buoyed demand for the safe-haven currency. The index has gained approximately 3% so far this month with more upside potential seen in the coming months, supported by hawkish Fed.

2. Euro extended its decline against the greenback, hovering below parity level to trade at around 0.98, not far off a 20-year low of 0.95 level touched earlier in the week. Upbeat US economic data also paved way for further Fed rate hikes which could put the Euro under further pressure against the greenback in the coming months. Recent CPI figures revealed that the Euro Area’s inflation rate rose above 10% in September, a new record high and above market expectations of 9.7%. Elsewhere, while inflation rates in France and Spain eased, figures remained significantly higher than the central bank’s aim of 2%, paving way for further ECB rate hikes. ECB President Lagarde recently said the central bank would keep raising interest rates to rein in inflation, even at the expense of growth, with several ECB members calling for another 75 basis point hike in October. On the other hand, the British pound hit a high of $1.12 on hopes that the government will change economic policies, such as unfunded tax cuts which had caused the pound to drop to historic lows of $1.03 against the US dollar previously and prompted the BoE to intervene in the Gilts market earlier this week.

3. Commodity currencies suffered on the back of a stronger Dollar with the Australian dollar trading at around 0.65, close to its lowest levels in 2.5 years. Investors are also getting ready for the Reserve Bank of Australia’s policy meeting on October 5, with anticipation of a 50 basis points rate hike by the RBA to fight inflation. The cash rate has now gone up by a total of 225 basis points by the RBA, reaching a seven-year high of 2.35%. On the data front, consumer prices in Australia fell to 6.8% in August from a record high of 7% in July. Michele Bullock, Deputy Governor of the RBA, recently stated that the central bank could look to slow the pace of rate hikes as wage growth started to ease.

4. Elsewhere, Gold traded lower at around $1660 an ounce, recording its sixth consecutive month of decline on the back of the Dollar’s strength and higher Treasury yields, combined with expectations that the US Federal Reserve will move forward with its aggressive plan to combat surging inflation. Higher interest rates prospects also dampened the appeal of owning the non-yielding bullion.

Salzworth Asset Management