The US dollar rose across the board yesterday afternoon as the new chair of the Federal Reserve made some hawkish comments during a congressional testimony. Jerome Powell revised his assessment of the US economy upward and suggested that the Fed could increase borrowing rates four times this year, compared to three hikes expected by market participants and signalled by the central bank so far.
The dollar index broke the 90.0 resistance level and stabilised around 90.45 amid a sharp drop in EUR/USD and a continued rally in USD/CHF. The single currency fell 1% to $1.2220, while the dollar rose to 0.9415 against the Swiss franc. On the equity side, stocks fell across the globe with the S&P 500 sliding 1.27% to 2,744 and the Dow Jones closing at 25,410, down 1.16% on the session. In the bonds market, US Treasury yields spiked on Powell’s remarks with the 10-year yield hitting 2.92%, while on the short-end of the curve, the 2-year yield printed a fresh 9-year high at 2.28%.
We have the feeling that investors don’t know where to stand as the effects of higher borrowing rates will have various implications for the US economy. Indeed, it could trigger a slowdown in growth as the cost of debt increase, making more difficult for private companies and consumers to borrow money and increasing the debt burden for government. On the other hand, it will make the dollar more attractive for investors. For now, it seems that the market is still undecided: the greenback is still trading range bound against most of its peers.
By Arnaud Masset