Dollar rallies, stocks sink as traders prepare for rate hikes

HONG KONG (AFP/ APP): The dollar surged Wednesday against other major currencies and equities sank after a forecast-beating US economic report gave new life to talk of a third straight blockbuster interest rate hike next month.

The services sector data showed the world’s top economy remained resilient in the face of surging prices and borrowing costs, highlighting the job the Federal Reserve has in taming inflation while trying to prevent a recession — a goal many observers doubt can be achieved.

The reading added to the gloom blanketing trading floors as investors face a range of headwinds including a worsening energy crisis in Europe, Russia’s war in Ukraine and Chinese economic woes caused by Covid-19 lockdowns.

“Overall, the (services) survey paints a picture of solid activity in the services sector of the US economy supported by wages growth suggesting the Fed still has more work to do in order to cool the economy,” said National Australia Bank’s Rodrigo Catril.

All three main indexes on Wall Street finished in the red Tuesday as they reopened after a long weekend, with expectations growing that the Fed will announce a third successive 75 basis-point rate hike later this month.

Several top Fed officials — including head Jerome Powell — have lined up in recent weeks to say their main focus is bringing inflation down from four-decade highs, even if that means tipping the economy into recession.

The prospect of more big rate hikes has sent the dollar soaring this year, and on Wednesday it hit a new 24-year high of 144.38 yen.

The yen’s losses continued to mount despite comments from government officials hinting at possible intervention to provide support, though there was no sign the Bank of Japan would shift from its ultra-loose monetary policies aimed at kickstarting the economy.

The euro remained lodged below parity with the dollar and at a 20-year low, even as the European Central Bank prepares to ramp up rates, having done so in July for the first time in eight years.

And the greenback was also pushing towards a 37-year peak against sterling, which saw a brief rally Tuesday on reports new UK Prime Minister Liz Truss was planning a £130 billion ($150 billion) package to freeze energy bills.