Four thousand U.S. dollars are counted out by a banker at a bank in Westminster
Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. Reuters / Rick Wilking

The U.S. dollar stood just below a 20-year peak on Tuesday and just about everything else nursed losses as investors braced for aggressive Federal Reserve rate hikes and a possible recession.

Markets have scrambled to bet on rapid-fire hikes in the wake of an unexpectedly hot inflation reading on Friday. Consecutive 75 basis point rate rises in June and July are close to fully priced, sending shockwaves across asset classes.

The dollar has gained with yields and as investors seek shelter from the storm. The dollar index scaled a two-decade peak of 105.29 on Monday and held near that level in Asia.

It has hit one-month highs on the euro, Australian dollar, New Zealand dollar, Swiss franc and Canadian dollar and it made a fresh one-month top of $1.0397 per euro on Tuesday, before retreating slightly to $1.0438.

Sterling scraped from a two-year low to $1.2180, but is weighed down as the Fed is seen outpacing the Bank of England, which is expected to deliver a 25 bp hike on Thursday.

Even the Norwegian crown, which has been supported by firm oil prices and a central bank that began hiking last year, touched a two-year low of 9.9295 per dollar in Asia.

"The dollar seems to be the stagflation hedge of choice," said Bank of Singapore strategist Moh Siong Sim.

"The market is starting to turn a lot more fearful," he said. "On the inflation front, things do not look good and the Fed needs to respond."

The Aussie was the best performer throughout the Asia session, attempting a bounce with S&P 500 futures. It was last up 0.5% to $0.6962, though that is still close to May's trough at $0.6829 and analysts remained cautious. [AUD/]

Nerves about official intervention also gave brief respite to the yen, but it was soon on the back foot after the Bank of Japan expanded a round of bond purchases, knocking the 10-year government bond yield back to its 0.25% cap.

It last traded at 134.55 per dollar after hitting a 24-year low of 135.22 on Monday.

"Given Wednesday may see the Fed go 75bps and flag more, while the BOJ on Friday will only flag more bond buying, JPY is not going to stay at these levels for long. It's going to get much, much worse," said Rabobank strategist Michael Every.

FED WATCH

The Fed concludes a two-day meeting on Wednesday and CME's FedWatch tool shows markets priced for a 96% chance of a 75 basis point hike, which would be the biggest since 1994.

Goldman Sachs tips 75 basis point moves at both the June and July meetings and rates at 3.25-3.5% by year end.

Futures show expectations of nearly 200 bps of tightening by September and the two-year Treasury yield is up about 50 basis points since Thursday's close at 3.3091%.

The 10-year yield similar, at 3.3085%, in a signal that investors fear the rapid tightening path will hurt growth and possibly bring on a recession. [US/]

"The policy challenge is that the Fed has no idea how much monetary tightening is needed and will only find out it has done too much, long after the event," said Societe Generale strategist Kit Juckes.

Dollar gains have punished emerging market currencies, and the flight from risky investments has battered cryptocurrencies.

Bitcoin is down 30% in June and came close to dropping below $20,000 in Asia before steadying around $22,000, while ether also tested resistance around $1,000.

India's rupee hit a record low on Monday.

South Korea's won touched its lowest level since March 2020 on Tuesday at 1,292.5 per dollar, though it was kept from further losses by official hints at intervention and dealers' suspicion that authorities were selling dollars.

The Malaysian ringgit, Thai baht and Indonesian rupiah made multi-year lows. [EMRG/FRX]