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Dollar’s March to Record Puts Europe Currencies at Historic Lows

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(Bloomberg) -- The dollar’s march to record highs is sweeping aside other currencies, with the euro and pound hitting fresh multi-decade lows on Friday.

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The common currency slid 1% to its weakest since 2002, while the pound dropped as much as 2.1% to its lowest in 37 years, putting it on track for its worst week since early May. That came as a gauge of the greenback hit another all-time high, with traders focusing on the growing gap between interest rates in the US and elsewhere.

At the end of a week filled with central bank meetings and even a foray by Japan into the currency market to slow the selloff in the yen, another 75 basis-point rate move by the Federal Reserve has underscored its lead in delivering jumbo hikes to tame inflation pressures.

In comparison, the Bank of England’s 50 basis-point rise on Thursday suggested it would take a wait-and-see approach to inflation pressures in the coming months, while even a 100 basis point tightening by Sweden’s central bank failed to shore up its currency, given a lower outlook for rates in the coming months.

“Not a single central bank this week outdid the Fed in terms of rates,” said Geoffrey Yu, senior FX strategist at Bank of New York Mellon. “It’s about interest rates, and the market is keeping it simple. There’s a lot going on right now, but ultimately, who’s the most hawkish central bank? The Fed.”

The Swiss franc has slid more than 1% against the dollar since the Swiss National Bank’s 75 basis-point rate rise on Thursday disappointed some in the market who were betting on an even bigger hike. Norway’s krone is also suffering, with Norges Bank joining other policy makers in seeming more cautious about aggressive rate rises compared with the Fed.

Major central banks began raising interest rates since late last year, and have been tightening policy at different speeds and sizes to fend off continuing price pressures. The Federal Reserve began its raising cycle in March, later than the Bank of England, but its aggressive hikes have taken its interest rate to 3.25%, compared with the BOE’s 2.25%. Having started raising rates only in July, the European Central Bank’s official rates stands at a paltry 1.25%.

Lagging the Fed

This has led to a unrelenting selloff in the euro, the pound and other currencies as their central banks are seen as lagging the Fed’s commitment to taming inflation at all costs, even at the price of an economic slowdown. The biggest loser has been the yen, which has tumbled nearly 20% against the dollar so far this year as Japan’s persistently low interest rates have prompted investors to dump the low-yielding currency.

A small handful of countries including Japan and India have stepped into the currency market to defend their currencies against the dollar’s strength, but this has been futile as even the currency-buying efforts of countries with massive currency reserves are seen to be no match for a market which is tilted towards dollar dominance.

“The dollar is already trading at a huge risk premium by attracting global safe-haven inflows,” said Valentin Marinov, head of G-10 currency strategy at Credit Agricole SA, in a note. “The ability of other G-10 currencies to hold their ground from here will further depend on the credibility of the commitment of their respective central banks to match the Fed’s hawkishness or defend their currencies.”

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