By Karen Brettell

NEW YORK (Reuters) – The dollar hit a two-year high on Tuesday as concerns about slowing growth in China and expectations the Federal Reserve will aggressively hike rates boosted demand for the greenback.

The Japanese yen also rebounded as investors speculated that the Japanese central bank or government may act to stabilise the currency, which last week hit a 20-year low against the dollar.

Concerns about Chinese growth have increased with the financial hub of Shanghai having been under strict lockdown to fight COVID-19 for around a month.

Beijing overnight also ramped up plans for mass-testing of 20 million people and fuelled worries about a looming lockdown.

This is “adding fuel to the fire that is dollar strength,” said Erik Nelson, a macro strategist at Wells Fargo (NYSE:WFC) in New York.

The Wall Street Journal also on Tuesday reported that Chinese President Xi Jinping has told officials that he wants China’s economic growth to outpace the United States’ this year.

That may be slower than previously expected. China last month targeted economic growth of around 5.5% this year.

“Consensus for U.S. GDP growth this year is just barely above 3%, so that’s a huge, huge downgrade in terms of a growth target,” said Nelson.

The dollar index against a basket of currencies was last up 0.61% at 102.30, the highest since March 2020.

The offshore yuan held just below a 17-month low reached on Monday after China’s central bank eased banks’ foreign exchange holding requirements in an effort to stem the currency’s drop.

The euro fell 0.63% to $1.0644, the lowest since March 2020.

The single currency has been hurt by the economic impact of the war in Ukraine and by expectations the European Central Bank will move more slowly than the Fed in raising interest rates.

The euro added to losses after it was reported that Russian gas supplies under the Yamal contract to Poland have been halted.

The U.S. central bank is expected to raise rates by 50 basis points when it meets next week, and again in June and July. Fed funds futures traders expect the Fed’s benchmark rate to rise to 2.69% by year-end, from 0.33% today.

The dollar dropped 0.39% against the Japanese yen, on what appeared to be short-covering before the Bank of Japan concludes its two-day meeting on Thursday.

“There is a shift in sentiment and some concern in the market that officials are concerned about weakness and may take some measures,” said Neil Jones, head of FX sales, Financial Institutions at Mizuho in London.

Investors will be watching to see if the BOJ makes any changes to its yield curve control policy.

Japanese Prime Minister Fumio Kishida on Tuesday urged the central bank to maintain its ultra-loose monetary policy, brushing aside the idea of using interest rate hikes to prevent further declines in the yen.

The British pound dropped 1.20% to $1.2586, the lowest since July 2020.

Bitcoin fell 5.48% to $38,226 and ether fell 5.68% to $2,835.

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