Dollar soars to two-decade high as Putin shakes FX market ahead of Fed

Summary

• Dollar index at two-decade high
• Euro slides back toward two-decade lows
• Putin announces partial troop mobilization for Ukraine
• Markets gauging Fed hawkishness in Powell briefing

The dollar surged to a new two-decade high on Wednesday just ahead of another expected aggressive Federal Reserve interest rate hike, as investors fled for safety after a decision by Russian President Vladimir Putin to mobilize more troops for the conflict in Ukraine.

Putin on Wednesday called up 300,000 reservists to fight in Ukraine and said Moscow would respond with the might of all its vast arsenal if the West pursued what he called its "nuclear blackmail" over the conflict there.

The news propelled the dollar index, which measures the greenback's value against six major currencies, to 110.87 <=USD>, its strongest level since 2002.

The dollar index is up almost 16% this year and set for its biggest annual surge since 1981. It was last trading at 110.71, up about 0.5% on the day.

"Most of the dollar moves today are Putin-related," said Steven Englander, head of global G10 FX research and North America macro strategy at Standard Chartered in New York..

"When I look at my table, the five worst performing currencies are the Swedish crown, Polish zloty, Czech koruna, Hungarian forint and the euro. That's more a Putin worry because of hints that Russia might escalate the conflict in Ukraine and on what limits he puts on the weapons they use."

European currencies bore the brunt of selling in foreign exchange markets as Putin's comments exacerbated concern about the economic outlook for a region already hit hard by Russia's squeeze on gas supplies to Europe.

The euro fell to a two-week low of $0.9885 , within sight of two-decade lows touched earlier this month. It was last down 0.7% at $0.9901.

Sterling fell to a fresh 37-year low of $1.1304 and was last down 0.5% at $1.1335

Later on Wednesday, the Fed is expected to lift interest rates by three-quarters of a percentage point for a third straight time and signal how much further and how fast borrowing costs may need to rise to tame inflation. 

The policy decision, due at 1800 GMT, will mark the latest move in a synchronized policy shift by global central banks that is testing the resilience of the world economy and the ability of countries to manage exchange rate shocks as the value of the dollar soars.

"What the market is looking for is whether (Fed Chair Jerome) Powell says the Fed does not know how far they have to go and they'll go as far as they need to go," said Standard Chartered's Englander.

"If someone asks him whether he sees rates going to 5% and he says he doesn't see it, but doesn't rule it out if that's needed to get inflation down, then that would be really hawkish and means they're opening up rates to an even higher range than what the market anticipates."

The Australian and New Zealand dollars meanwhile plumbed multi-year lows. The Aussie dollar hit a trough of US$0.6655, its lowest since June 2020, while the New Zealand currency fell to US$0.5873, its lowest since April 2020.

Against the battered yen, the dollar was up 0.2% at 143.97, holding off recent 24-year peaks

"It was interesting to me that dollar/yen dipped on the news of the announcement, potentially indicating a return of the yen's safe-haven credentials which have been absent for much of the year," said Colin Asher, a senior economist at Mizuho Corporate Bank.