The dollar maintains its gains ahead of the Fed’s decision, and the yen is testing an upward path

The dollar maintained its recent gains today (Wednesday), trading near its highest levels in several weeks, against a number of major currencies, with markets awaiting the US Federal Reserve’s decision, amid expectations that it will witness the first increase in a possible series of interest rate hikes.

The dollar rose in parallel with US Treasury bond yields this week, and its biggest gains were against the yen and the New Zealand dollar, which fell to the lowest level in two months at $0.5737, during Asian trading, while the yen fell to 155.43 against the dollar, which is its lowest level in a week.

Carol Kong, currency strategist at Commonwealth Bank of Australia in Sydney, said that markets are already pricing in about a 90 percent chance of a 25 basis point rate hike, “which means the dollar will get a limited boost if the Fed raises rates.”

She added that there is a small possibility that the dollar will decline if the Federal Reserve raises interest rates, but its president, Kevin Warsh, played down during his press conference the risks of raising interest rates again. On the other hand, I expected the dollar to decline by more than 1 percent if the bank did not raise interest.

The euro settled at $1.1545, near its lowest level in a month recorded on Monday at $1.1523, while the British pound reached $1.3478, not far from the lowest level in 6 weeks at $1.3464 recorded on Monday.

The Bank of England is expected to keep interest rates unchanged when it meets on Thursday.

The Australian dollar settled at $0.7129.

Although global bond yields have risen simultaneously in recent weeks, currency markets have not witnessed relatively large movements. Sovereign bond yields moved in similar directions without significant changes in the differences between them and the yields of other countries.

But the dollar has gained momentum in recent sessions, amid expectations that the Federal Reserve, despite President Donald Trump's choice of interest rates to lower interest rates, may have to raise them several times to show its seriousness in curbing inflation, which has been exacerbated by the Iran war and the resulting rise in energy prices.

Calvin Tse, head of US strategy and economics at BNP Paribas, said that the bank “is somewhat skeptical that raising interest rates once, or even twice, will be sufficient to restore (the Fed’s) credibility in the markets. Especially after the bank lost some of this credibility.”

The yen is experiencing an upward trend

The yen is one of the most prominent exceptions to the state of relative stability in currency markets. It is expected that the Federal Reserve’s decision will have a major impact on its course.

The yen is witnessing one of the strongest waves of recovery in months, supported by shifting expectations towards a more stringent Japanese interest rate policy, in addition to talk of joint intervention from Japan and the United States, and expectations of Japanese investors returning their money to the country.

Markets are pricing in a probability of about 80 percent for the Bank of Japan to raise interest rates on Friday, according to LSEG data, and are also pricing in two increases of 25 basis points each by the end of January.

David A. said: Mayer, economist at Julius Baer, ​​said in a research note that the yen's path will remain largely dependent on interest rate differentials.

He added that the bank recently revised its forecast for the price of the dollar against the yen to 155 yen, in light of its skepticism about the ability of the Central Bank of Japan to keep up with the pace of monetary tightening that the markets are currently pricing in. Pointing to the continuing uncertainty, including the political preference for low interest rates in light of the ongoing fiscal expansion.

Among other Asian currencies, the South Korean won has risen by more than 15 percent against the dollar since the end of June, supported by capital flows returning to the country and profits achieved by major chip manufacturers.

As for the Chinese yuan, it lost momentum after a long rising wave near the level of 6.71 against the dollar, but it maintained its gains despite the widening difference between the decline in Chinese bond yields and interest rates in other economies.

Gold prices rose on Wednesday, as oil prices declined and investors awaited the US Federal Reserve’s decision on interest rates, with markets widely pricing in an interest rate hike.

Gold rose in instant transactions 0.8 percent to $4,328.39 per ounce by 03:10 GMT, after recording its lowest level in more than a month on Monday. On the other hand, US gold futures for December delivery fell 0.9 percent to $4,369.50.

Frank Wallbaum, a market analyst at the Naga.com trading platform, said that a strict decision from the Federal Reserve may push gold lower, while any dovish messages may ease bets on raising interest rates and help the metal recover.

He added that traders are also monitoring oil prices and developments in the Middle East.

Gold is typically seen as an inflation hedge, but higher interest rates increase the opportunity cost of holding the non-yielding metal.

Oil prices fell after an unexpected rise in US crude inventories, at a time when investors were assessing supply risks, following the suspension of oil loadings at the port of Yanbu.

Markets are currently pricing in a 92.4 percent probability that the Federal Reserve will raise interest rates by at least 25 basis points later today, according to the CME's Fed Watch tool. The monetary policy decision will be followed by a press conference by Federal Reserve Chairman Kevin Warsh.

In the markets, Commerzbank said that it is noteworthy that gold prices have not been subjected to greater pressure so far, indicating that the metal’s steadfastness may be supported by the continued financial concerns that are reflected in the rise in long-term government bond yields, in addition to the recent increase in political risks in the United States.

In terms of other precious metals, silver rose in spot transactions 1.5 percent to $64.60 per ounce, platinum rose 0.7 percent to $1,788.25, while palladium increased 1.6 percent to $1,309.80.

Oil prices fell on Wednesday, after an unexpected rise in US crude inventories, while investors assessed supply risks following information about the suspension of oil loadings at the port of Yanbu, following an attack targeting the “East-West” pipeline.

Brent crude futures fell 93 cents, or 0.86 percent, to $107.82 per barrel by 00:28 GMT, while West Texas Intermediate crude futures fell 97 cents, or 0.92 percent, to $104.86.

The two crude oil prices ended trading on Tuesday at an increase of more than $3 per barrel, recording their highest levels since May 19, after the suspension of loadings in Yanbu raised concerns about supplies, in conjunction with Saudi Arabia reducing oil shipments heading to Europe.

According to market sources, data from the American Petroleum Institute showed a rise in crude, gasoline and distillate stocks in the United States during the week ending September 11.

Crude inventories increased by 7.1 million barrels, compared to analysts’ expectations of a decrease of about 1.6 million barrels, according to a poll conducted by Reuters.

Haitong Futures said in a note that unexpected increases in gasoline and diesel stocks put pressure on prices, but noted that the rise in stocks in some areas does not change the state of scarcity of supply in the global crude market.

Sources reported to Reuters on Tuesday that oil loadings at the port of Yanbu had been suspended, after the “East-West” pipeline was closed following an attack launched by the Iran-aligned Houthis in Yemen on Friday.

In Libya, the National Oil Corporation announced the suspension of operations in 3 oil fields, after protesters from the Petroleum Facilities Guard closed a valve in the Hamda-Al-Zawiya pipeline to export crude.

However, Libya's oil production was not significantly affected by these developments, and amounts to about 1.4 million barrels per day, according to the head of the corporation, Masoud Suleiman, to Reuters.