U.S. Dollar Gains Sharply Across the Board as Recession Fears Mount

CURRENCY - NEW YORK. The U.S. dollar soared on Thursday, led by strong gains against the yen, sterling, and commodity currencies, as investors fretted about the risk of recession with the Federal Reserve likely to raise interest rates well into next year. The greenback's allure was magnified, amid worsening risk appetite as stocks fell.

Like the Fed, the European Central Bank raised interest rates for the fourth time in a row, although by less than at its last two meetings, pledged further hikes and laid out plans to drain cash from the financial system as part of its fight against runaway inflation. ECB President Christine Lagarde, in her press briefing, said upside inflation risks remain, which necessitates more tightening.

The Bank of England also raised its key interest rate by a further half-percentage point on Thursday and indicated more hikes were likely. Investors though bet that the BoE might be getting close to the end of its increases in borrowing costs.

"Both the Fed and ECB delivering more hawkish rate steers are compounding recession fears," said Joe Manimbo, senior market analyst at Convera in Washington.

"The dollar's boost from the Fed stems from it not being done raising rates and Chair (Jerome) Powell setting a high bar for rate cuts."

The Fed projected at least an additional 75 bps of increases in borrowing costs by the end of 2023. Its projection of the target federal funds rate rising to 5.1% in 2023 is slightly higher than investors expected. Powell was also particularly hawkish in his comments, noting that ongoing rate hikes are appropriate to get sufficiently restrictive.

J.P. Morgan Asset Management, in a research note, has increased the odds of recession to 60% from its initial forecast of 50%. "The Fed is raising rates at the fastest pace since 1980, the rest of the world is following its lead, quantitative tightening is in its early stages, and inflation remains painfully high," wrote Bob Michele, chief investment officer, at J.P. Morgan.

"It seems very aspirational to assume all this can end in a soft landing."

In afternoon trading, the dollar rose to two-week highs against the yen, and last traded up 1.6% at 137.665. The euro earlier hit $1.0737, the highest since June 9, after the ECB decision, before falling back to $1.0629, down 0.5% on the day.

The dollar index, a gauge of the greenback's value against a basket of currencies, rose 0.9% at 104.53 The greenback briefly pared gains after data on Thursday showed that U.S. retail sales fell more than expected in November, while the labor market remains tight, with the number of Americans filing for unemployment benefits declining last week.

Sterling also fell sharply as investors believe the BOE is nearing the end of its rate hikes. It was last down nearly 2% at $1.2183.

The Norwegian krone dropped as well versus the dollar after Norway's central bank raised its benchmark interest rate by 25 basis points to a 13-year high of 2.75% on Thursday, as expected by economists, and said it will "most likely" hike again in the first quarter of 2023. The dollar surged 1.5% against the Norwegian currency to 9.866.

The Swiss franc also fell after Swiss National Bank Chairman Thomas Jordan said it was too early to "sound the all-clear" on high inflation after the central bank hiked interest rates again on Thursday and hinted further increases were still possible. The SNB raised its policy interest rate by 50 basis points to 1% - the central bank's third hike this year as it stepped up its campaign to dampen the rise in prices.

The dollar was last up 0.4% versus the franc at 0.9285. The Australian and New Zealand dollars were down sharply against the greenback. The Aussie fell 2.3% to US$0.6702, while the New Zealand dollar slid 1.8% to US$0.6345.