The dollar rose as the nerves of stock markets shook
Picture showing US dollar coins
Igor Golovniov | SOPA photos | LightRocket via Getty Images
The dollar started the week in full swing, buoyed by a sharp rise in US yields and investors’ bias towards safety as lockdowns in China, war on the edge of Europe and fear of higher interest rates sent markets nervous.
The dollar hit a 22-month high on the growth-sensitive New Zealand dollar in early trade and rose more than 0.5% on the Australian dollar to a three-month high as US stock market futures fell 1%.
The benchmark 10-year Treasury yield hit its highest level since 2018 at 3.1464%, and at 130.73 yen, the dollar was swinging from a two-decade high.
The dollar approached a five-year high against the euro, falling 0.2% to $1.0529. The British pound hovered below its two-year low hit last week after the Bank of England warned that the British economy was facing a recession.
“The dollar will be supported by outperforming US economic performance and weak stock prices,” said Joe Caporso, strategist at Commonwealth Bank of Australia in Sydney.
“Despite the substantial increases in interest rates, financial conditions have not tightened much in the major economies… The need to tighten financial conditions and rein in inflation is the reason behind other large increases.”
The US Dollar Index rose for the fifth consecutive week last week and touched its highest level in nearly 20 years after the US Federal Reserve raised its benchmark interest rate by 50 basis points and strong jobs data boosted bets for more big hikes.
The index was last at 103.78. Futures markets expect a 75% chance of a 75 basis point rate hike at the Fed’s next meeting in June and over 200 basis points to tighten by the end of the year.
Wednesday’s US inflation data could lead to more solid bets, especially if the pace of major price hikes does not ease to 8.1% as expected.
“Risks around US CPI look two-fold; moderation from 8.5% would be fairly comfortable, but a hike would revive expectations for a 75bp Fed hike, possibly giving the dollar a boost,” ANZ Bank analysts said.
“The notion that a simultaneous global tightening might continue gently now seems like a forgotten dream as the reality of the volatility gnaws at it.”
Cryptocurrencies were battered in a rush from risky assets and Bitcoin was posting losses over the weekend and near its lowest level for the year at $34,000 while Ether, which was down 4% on Sunday, was at $2,525.
Meanwhile, the war in Ukraine is disrupting global commodity markets, and lockdowns in China are putting a brake on growth.
Unemployment hit its highest level since March 2020 in China last month and the yuan came under pressure near an 18-month low of 6.7319 per dollar in foreign trade.