Dollar Extends Gains On Fed Rate Hike Expectations

The dollar extended gains Friday on expectations the Federal Reserve will press ahead with its programme of bumper interest rate hikes for the rest of the year.

Traders were girding for another possible intervention by Tokyo after the yen sank past 150 per dollar, while sterling remained under pressure owing to uncertainty in Westminster after Prime Minister Liz Truss resigned after just six weeks in office.

The fear that has gripped markets for most of the year returned after a brief respite at the start of the week, sending equity markets back into the red, with a series of better-than-expected earnings results unable to lift the gloom.

The dollar burst to a new 32-year high against the yen on Thursday as investors bet the Fed will ramp up borrowing costs much more as it struggles to rein in prices, while the Bank of Japan refuses to budge from its ultra-loose policies citing the need to support the torpid economy.

Even data Friday showing Japanese inflation hit an eight-year high last month -- or more than 30 years when excluding VAT rises -- was unable to change expectations that the central bank will continue to hold firm.

"In October, inflation may reach 3.3 percent or 3.4 percent as many food prices are going up, mobile phone fees are giving a lift and service prices are rising," said Mari Iwashita of Daiwa Securities Co.

"The BoJ seems to focus on downside risks overseas to conclude that it will need to keep up monetary easing. It strikes me that they have already made the decision to maintain easing."

With the dollar sitting around 150.20 yen, there is a growing sense that authorities in Tokyo will step in to support their currency, though analysts warned that such moves rarely have a lasting effect. The last intervention was on September 22, when the dollar hit 145.90 yen.

Finance Minister Shunichi Suzuki again said on Friday that the government was prepared to move and that the recent sudden, one-sided yen weakness was undesirable.

The dollar was also elevated against sterling after another day of drama in London, where Truss gave in to pressure to resign after removing her finance and interior ministers within days and seeing her debt-fuelled, tax-cutting mini-budget torn up.

The pound initially rallied on the news but fell back as traders contemplated more drift in government.

"Truss has no doubt been an unmitigated disaster and I'm not sure who exactly will make the country feel at ease at this point," said OANDA's Craig Erlam.

"There will obviously be calls for a general election but that won't provide any certainty or leadership for the country in the midst of a crisis. It would appear there are only bad options on the table so we probably shouldn't expect a positive outcome."

Equity markets fell back again, extending Thursday's losses and tracking another sell-off on Wall Street as expectations for more rate hikes by central banks around the world continue to grow owing to stubbornly high inflation.

On Thursday, the head of the Philadelphia Fed, Patrick Harker, said: "We are going to keep raising rates for a while.

"Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above four percent by the end of the year", then take a step back in the new year, he said.

Observers say the Fed could lift rates to as high as five percent before they take their foot off the pedal, and even then keep them there until officials are happy that prices are under control. They are currently at 3.0-3.25 percent.

In early trade, Tokyo, Hong Kong, Sydney, Seoul, Singapore, Wellington, Taipei and Manila were all in the red, though Shanghai and Jakarta edged up.

Tokyo - Nikkei 225: DOWN 0.2 percent at 26,951.59 (break)

Hong Kong - Hang Seng Index: DOWN 0.5 percent at 16,205.50

Shanghai - Composite: UP 0.1 percent at 3,036.56

Pound/dollar: DOWN at $1.1200 from $1.1224 on Thursday

Dollar/yen: UP at 150.25 yen from 150.19 yen

Euro/dollar: DOWN at $0.9772 from $0.9787

Euro/pound: UP at 87.21 pence from 87.17 pence

West Texas Intermediate: UP 0.1 percent at $84.58 per barrel

Brent North Sea crude: DOWN 0.1 percent at $92.32 per barrel

New York - Dow: DOWN 0.3 percent at 30,333.59 (close)

London - FTSE 100: UP 0.3 percent at 6,943.91 (close)