The dollar rose to its highest level against the euro in nearly two decades on Wednesday after the US central bank (Fed) announced an interest rate hike in conjunction with a partial mobilization announced by Vladimir Putin, AFP reported.

Shortly after 18:00 GMT, the dollar hit $0.9814 per euro for the first time since late October 2002, just months after the official transition to the single currency.

The dollar also reached its highest level against the pound since March 1985 at $1.1238 per pound.

On Wednesday, the Fed raised its key interest rate by 0.75 percentage points to a range of 3% to 3.25%.

The Federal Reserve’s announcement was accompanied by statements from Russian President Vladimir Putin, who earlier announced a “partial” mobilization of about 300,000 Russian reservists and talked about using nuclear weapons to “protect Russia.”

The remarks came a day after Russia announced on Tuesday that it would hold an emergency “referendum” on annexation in four regions of Ukraine.

Widespread sentiment about an escalating conflict had already undermined all European currencies, led by the euro, before the Fed dealt them another blow.

“Concern about the potential escalation of the war in Ukraine with the mobilization of hundreds of thousands of Russian reservists is sending investors into safe havens,” including the dollar, said Suzanne Streeter, an analyst at Hargreaves Lansdown.

The Bank of England is under pressure

“The 0.75 percentage point hike didn’t really affect the market,” DailyFX’s Christopher Vecchio said of the Fed’s message.

According to him, the increase in the dollar rate was due to the update of the Fed’s rate forecast.

“The Fed is telling us that interest rates will reach between 4.4% and 4.9% in 2023, which is more than the market had been predicting,” meaning around 4.5% at the peak of the tightening cycle, Christopher Vecchio explained.

In addition, central bankers ruled out any rate cuts until 2024, surprising traders who had been betting on the second half of 2023.

Fed Chairman Jerome Powell warned of the risks of “premature policy easing.”

The dollar index, an index that compares the dollar to several major currencies, rose to a 20-year high on Wednesday (June 2002).

The Fed’s accelerated pace is putting pressure on all major central banks, including the Bank of England, which will release its monetary policy decision on Thursday.

While most economists had previously expected the Bank of England to raise interest rates by half a percentage point, speculation of a 0.75 percentage point hike, according to the Fed, has gained momentum in recent days.

“Downside risks to the dollar are limited, and the Fed still expects to raise rates by more than a basis point before the end of the year,” said Joe Manimbo of Convera.