The dollar climbs and the pound falls as hawkish central banks dampen risk appetite

23 Jun 2023 , 10:46 AM

As hawkish remarks from international central banks, including the Federal Reserve, fuelled concerns that their aggressive monetary tightening could force economies into a deeper depression, the dollar benefited from a wave of risk aversion on Friday.

With traders also concerned about a UK recession, the pound failed to hold gains after the Bank of England (BoE) raised interest rates by more than the expected 50 basis points on Thursday in reaction to persistently high inflation.

The danger that higher rates will cause an economic slump has caused some investors to seek safe-haven assets like the U.S. dollar, even though higher rates are normally supportive of currencies.

After initially rising to a level close to a year high in the wake of the BoE’s move, the pound was last trading 0.07% weaker at $1.2740. It was expected to lose more than 0.5% per week, ending three weeks in a row of gains.

After Turkey’s central bank’s 650 basis point increase to 15% on Thursday fell short of expectations, the Turkish lira dropped to a historic low of 25.589 against the US dollar.

The dollar increased significantly versus other currencies and was close to a seven-month high at 142.90 yen. As the Bank of Japan (BOJ) continues to maintain its ultra-dovish posture in opposition to its hawkish peers overseas, the Japanese yen has come under fresh pressure.

The BOJ’s 2% target for Japan’s core consumer prices was exceeded for the 14th consecutive month, according to statistics released on Friday. Separate data also revealed that the country’s industrial output contracted again in June and that the service sector’s growth slowed for the first time in seven months.

The U.S. dollar increased 0.05% against a basket of six major rivals to reach 102.44, while the euro fell 0.04% to $1.0950.

Jerome Powell, the chair of the Federal Reserve, stated on Thursday that the bank would raise interest rates going forward, but at a ‘careful pace.’ The majority of members of the Federal Open Market Committee anticipate further rate increases.

The probability that the Fed will increase rates by 25 bps at its policy meeting next month is currently seen by the money markets at 74%.

Both the Swiss National Bank and the central bank of Norway indicated that additional tightening was likely to occur after raising rates by 25 basis points and 50 basis points, respectively, on Thursday.

Interest rates are still rising and inflation is high. There is currently a slowing in economic growth, which (may) also result in a possible recession. Therefore, the sentiment is not very good.

After dropping nearly 0.6% on Thursday, the risk-sensitive Australian dollar dropped 0.16% to $0.6746, while the New Zealand dollar moved down 0.05% to $0.6174 after falling 0.4% in the previous day.

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