Dollar Dominance Rips Through Every Market on Fed, China Risks
- Greenback hits fresh 20-year high vs yen, up 1% vs Aussie
- U.S. inflation data may pose correction risk: Monex’s Harvey
By Ruth Carson and Naomi Tajitsu
(Bloomberg) --
The dollar strengthened against all of its major peers as China’s Covid lockdowns, accelerating global inflation and the worsening economic outlook boosted demand for the U.S. currency as a haven.
A gauge of the greenback advanced to nearly a two-year high as a slump in China’s export growth underlined concerns about its economy and the risk to global supply chains. Adding to the dollar’s attraction are risk aversion from the war in Ukraine, higher Treasury yields and the hawkish Federal Reserve.
The dollar’s rally is sending it to new highs against many of its global counterparts. The pound slid to a fresh 2020 low, the yen dropped to the weakest since 2002, while India’s rupee slumped to a record.
“It doesn’t look like this trend will turn any time soon,” said Chris Turner, head of currency strategy at ING Groep NV. “You’ve got the Fed, you’ve got the renmimbi and you’ve got Europe, and it’s hard to bet on any of those issues changing in the near term.”
The U.S. currency climbed as much as 0.6% against the yen to 131.35, its highest since April 2002. This helped push the Bloomberg Spot Dollar Index up for a third straight day, extending gains after Friday’s U.S. payroll numbersdrove up Treasury yields, giving investors more reason to funnel funds into the world’s largest economy. U.S. Treasuries extended a slide on Monday, driving the yield on five-year notes to the highest since 2008.
Market positioning data shows the dollar is drawing in more adherents all the time. Hedge funds boosted long bets on the currency to the highest level this year in the week to May 6, according to data from the Commodity Futures Trading Commission compiled by Bloomberg.
WATCH: Andrew Sheets, chief cross-asset strategist at Morgan Stanley, examines the dollar’s dominance over global currencies.
Many of the concerns about slowing global growth are being driven by China. The nation’s Premier Li Keqiang warned on the weekend of a “complicated and grave” employment situation as Beijing and Shanghai tightened curbs on residents in a bid to contain Covid outbreaks in the country’s most important cities.
China’s weak export reading comes on the heels of a report last week showed manufacturing activity plunged to its worst level since February 2020. Currencies linked with Chinese growth struggled, with both the Australian and New Zealand dollars slumping around 1% on the day.
Developing-nation currencies are also being pummeled due to the threat of funds being pulled from their stock and bond markets as U.S. yields rise.
“Fragile” emerging economies with current-account deficits including Turkey and nations in Africa are particularly vulnerable, said Alvin Tan, a strategist at Royal Bank of Canada in Hong Kong. A stronger dollar “encourages capital outflows from emerging-markets and tightens EM financial conditions,” he said.
Traders will next be looking to Wednesday’s monthly U.S. consumer-price data, given the pace of inflation in April is expected to slow in a Bloomberg survey. That could spark a re-think in the market about how aggressive the Fed’s tightening path will be, according to Simon Harvey, head of currency analysis at Monex Europe.
“All it takes a minor slip in the core CPI reading for markets to go back to the drawing board,” said Harvey. “Especially because of the aggressive positioning we’ve been seeing, it only needs one slip for markets to want to pullback in Treasuries, money market pricing and the dollar,” he said, adding a weak reading could spark a dollar retreat toward 130 versus the yen.
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(Updates throughout.)