Dollar firm as markets brace for another big Fed rate hike

By Kevin Buckland

TOKYO (Reuters) – The dollar remained firm below a two-decade high versus major peers on Tuesday, as investors braced for the Federal Reserve to continue its aggressive interest-rate-hiking campaign to rein in overheated inflation.

The , which measures the greenback against six counterparts, was little changed at 109.53, stable for the moment after pulling back from as high as 110.79 earlier this month, a level not seen since June 2002.

The two-year U.S. Treasury yield, which is extremely sensitive to policy expectations, rose as high as 3.970% overnight for the first time since November 2007. The 10-year yield reached a high of 3.518%, a level not seen since April 2011.

Investors have fully priced another 75 basis point bump by the Federal Open Market Committee for Wednesday, and lay 19% odds for a super-sized full percentage point increase.

While still elevated, those bets have come down from around 38% on Wednesday, when they were shocked higher by a surprise acceleration in U.S. consumer prices for August.

The dollar eased 0.15% to 142.96 yen, continuing a week-long consolidation following two attempts at 145 this month that took it as high as 144.99 on Sept. 7 for the first time in 24 years. The dollar-yen currency pair tends to track the long-term yield spread between U.S. and Japanese government bonds.

The Bank of Japan decides policy on Thursday, and is widely expected to keep its ultra-easy stimulus settings unchanged. They include pinning the 10-year yield near zero.

“We have to see the FOMC,” said Tohru Sasaki, a strategist at J.P. Morgan in Tokyo.

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

The euro was little changed at $1.0030, after grinding slowly higher over the past week and strengthening its position above parity. It dropped as low as $0.9864 on Sept. 6 for the first time in two decades.

Sterling was flat at $1.14295, finding its feet after a drop to a 37-year low of $1.13510 at the end of last week.

The Bank of England will decide policy on Thursday. Investors are split over whether a 50 or 75 basis point hike is on the way.

The risk-sensitive Australian dollar slipped 0.07% to $0.6722 and the New Zealand dollar fell 0.23% to $0.59435.

eased 0.48% to $19,445, after swinging between a two-month low of $18,540 and a 3 1/2-week high of $22,781 over the past two weeks.

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