Dollar Hits 5-Week High Ahead of Jackson Hole Amid Hawkish Fed

The U.S. dollar index reached a new five-week high on Monday after a second Federal Reserve member signaled the probability of ongoing aggressive monetary tightening ahead of this week's Jackson Hole symposium.

Russia's announcement of a three-day stop to European gas supplies via the Nord Stream 1 pipeline at the end of this month has exacerbated the region's energy crisis, sending the euro to a fresh five-week low.

China's currency fell to its lowest level in nearly two years after the central bank cut key lending rates, adding to a series of monetary easing measures intended to bolster an economy reeling from COVID-19 crackdowns and a property crisis.

The U.S. dollar index, which compares the greenback to six rivals including the euro, rose to 108.26 for the first time since July 15 and was last up 0.074% at 108.23.

This follows a gain of 2.33 percent last week, which was its greatest weekly increase since April 2020, amid a chorus of Fed policymakers emphasizing the need to do more to reign in decades-high inflation.

Thomas Barkin, president of the Richmond Federal Reserve, stated on Friday that the "desire" among central bankers was for faster, front-loaded rate hikes.

"Fed speakers have been emphasizing that additional rate hikes are forthcoming given that the fight against inflation has not yet been won," scaring markets ahead of the Jackson Hole meeting in August.

Rodrigo Catril, senior FX strategist at National Australia Bank, wrote in a client note that he anticipates Fed Chair Jerome Powell to emphasize that tightening is "still a long way from the conclusion" on March 25-27.

The money markets currently predict a probability of 47.5% for another massive 75 basis point rate hike on September 21, and 52.5% for a half-point increase.

With recession risks on the rise, economists surveyed by Reuters tilt toward a 50 basis-point increase in interest rates.

In Tokyo trade on Monday, benchmark 10-year U.S. Treasury yields surpassed 3% for the first time since July 21.

Against Japan's currency, which is very sensitive to U.S. yields, the dollar reached its highest level since July 27 at 137.40 yen.

The dollar reached a high of 6.8308 yuan in onshore trade for the first time since September 2020 after the People's Bank of China lowered the prime rates for one- and five-year loans, as expected.

This followed a surprising reduction in interest rates last week.

The dollar reached 6.8520 against the offshore yuan, its highest level since September 2020.

The euro fell below $1.0026 for the first time since July 15 before settling at $1.0027, down 0.13 percent.

The British pound decreased 0.23% to $1.1805, approaching Friday's five-week low of $1.17925.