Dollar closes as markets brace for another big Fed rate hike

By Kevin Buckland

TOKYO (Reuters) – The dollar remained firm below a two-decade high against its major peers on Tuesday as investors braced for the Federal Reserve to continue its aggressive interest rate hike campaign to contain excessive inflation.

The dollar index, which measures the greenback against six peers, was little changed at 109.53, flat for now after falling from a high of 110.79 earlier this month, a level not seen since June 2002.

The two-year US Treasury yield, which is extremely sensitive to political expectations, hit 3.970% overnight for the first time since November 2007. The 10-year yield hit an all-time high of 3.518% since April 2011. .

Investors fully priced another 75 basis point increase by the Federal Open Market Committee for Wednesday, and set a rating of 19% for a full percentage point increase.

While still high, those bets were down around 38% on Wednesday, when they were shocked by a surprise acceleration in US consumer prices in August.

The dollar eased 0.15% to 142.96 yen, continuing a week-long consolidation after two attempts at 145 this month took it to 144.99 on September 7 for the first time in 24 years. The dollar-yen currency pair tends to follow the long-term yield differential between US and Japanese government bonds.

The Bank of Japan decides policy on Thursday and is largely expected to keep its ultra-easy stimulus parameters unchanged. These include pinning the 10-year yield near zero.

“We need to see the FOMC,” said Tohru Sasaki, strategist at JP Morgan in Tokyo.

“The dollar-yen will eventually break above 145, but the speed depends on how hawkish the Fed is and how interest rate differentials evolve.”

The Euro was little changed at $1.0030, after rising slowly over the past week and strengthening its position above parity. It fell to $0.9864 on September 6 for the first time in two decades.

The pound was steady at $1.14295, finding its feet after falling to a 37-year low of $1.13510 late last week.

The Bank of England will decide its policy on Thursday. Investors are divided on whether a 50 or 75 basis point hike is on the way.

The risk-sensitive Australian dollar slipped 0.07% to $0.6722 and the New Zealand dollar fell 0.23% to $0.59435.

Bitcoin fell 0.48% to $19,445, after hovering between a two-month low of $18,540 and a 3 1/2-week high of $22,781 in the past two weeks.

(Reporting by Kevin Buckland; Editing by Bradley Perrett)

Lynn A. Saleh