Wednesday, October 20, 2021

Dollar set for best week since June on expected Fed tightening

LONDON – The dollar started the final quarter of 2021 near its highest levels of the year, and headed for its best week since June, as investors expected the Federal Reserve to lower US interest rates higher than its key peers. Will pick up soon.

Cautious market sentiment due to COVID-19 concerns, a faltering China growth, and the Washington standoff ahead of an imminent deadline to lift the US government’s borrowing limit also supported the dollar, seen as a safe-haven asset. goes.

Refinitiv’s measure of the dollar index was 94.313, up 1.1 percent so far this week, the biggest weekly increase since the end of June.

Dollar index set for best week since June

Dollar set for best week since June on expected Fed tightening

“Last week’s Fed meeting added new life to the debate about a possible 2022 Fed funds rate hike,” said Jane Foley, head of FX strategy at Rabobank.

“This is positive for USD on two fronts. Firstly USD looks better in the perspective of direct interest rate differential. Secondly, a rise in US rates and a stronger USD will weigh on the growth outlook in EM.

Foley said the growth outlook for emerging markets is already fueled by concerns of a slowdown in China and fears of an energy crisis.

“The result is that USD benefits from declining risk appetite and exits higher risk EM markets.”

The euro was stable at $1.1582 on Friday, but has fallen nearly 1.3 percent during the week, and has fallen through key support around $1.16 to touch its lowest level since July 2020.

The yen jumped from a 19-month low overnight but has lost 0.6 percent for the week and doubled in a fortnight as an increase in US Treasury yields pulled inflows from Japan into the dollar. It was last trading at 111.21 per dollar.

The benchmark 10-year Treasury yield is up for the sixth straight week and real 10-year yields, discounted for inflation, are rising much faster than their counterparts in Europe.

“As long as the market is confident that the US will begin tightening monetary policy within a reasonable time frame, the dollar should be well supported,” said Societe Generale strategist Kit Jux.

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“The European Central Bank is likely to keep rates below zero, while a Fed hike should keep the EUR/dollar in the post-2014 range, with the center of gravity around $1.12-1.16,” he said.

Commodity currencies jumped on the dollar on Thursday after a Bloomberg report that China had ordered energy companies to secure supplies for the winter at all costs, but came back under pressure on Friday.

world currencies
world currencies
System of various world currencies including Chinese Yuan, US Dollar, Euro, British Pound, pictured 25 January 2011. (Kepper Pempel/Illustration/Reuters)

Beijing has been scrambling to deliver more coal to utilities to restore supply amid a power crunch that has rattled the market because of the prospect of economic growth.

The Australian dollar fell 0.3 per cent to $0.7203 and fell 3.6 per cent in the third quarter – the worst performance of any G10 currency against the dollar – as prices of Australia’s top export, iron ore, fell sharply. The New Zealand dollar fell 0.2 percent to $0.6882.

The central banks of the two countries meet next week, which saw the Reserve Bank of New Zealand hiking, while the Reserve Bank of Australia is expected to stick with its forecast where they are until 2024.

Sterling was also an underperformer last quarter, falling 2.5 percent, and is set to enter its worst week in more than a month, despite growing supply chain problems with a hawkish-sounding central bank. weighed down by concerns about.

Sterling was trading just above a 9-month low of $1.3452, down 0.2%.

Markets in Hong Kong and China remained closed on Friday. Traders are waiting for US personal spending and core consumption deflator data later in the day and panic for any progress on the debate on raising the US debt limit.

The deadline to authorize additional Treasury borrowing looms in mid-October.

by Ritwik Carvalho

Reuters

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This News Originally From – The Epoch Times

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