Dollar stands tall as traders brace for tapering

Singapore, Sep 29 (BNA): The dollar traded near this year’s highs on Wednesday, after rallying with US yields and benefiting from investor concern about the Federal Reserve starting to withdraw policy support as global growth headwinds gather.

The dollar rose broadly overnight with the dollar index rising to an 11-month high at 93.805. It was marginally below that level early in the Asian session at 92.728.

US Treasury yields soared – with benchmark 10-year interest rates rising 25 basis points in five sessions to 1.5548% – as Fed tapering looms before the end of the year and inflation starts to look more steady than initially thought.

The Japanese yen, which is influenced by US yields as higher rates could attract inflows from Japan, fell about 2% in five sessions and at 111.57 per dollar not far from its lowest level since February 2020, Reuters reported.

Euro fell to a one-month low overnight, last buying at $1.1684, also testing key support levels around 2021 lows at $1.1664 and November 2020 lows at $1.1602.

Coupled with the Fed’s hawkish tone, energy prices are rising and concerns are growing about China’s growth outlook — now at risk of a chaotic meltdown at developer China Evergrande and power outages affecting production.

Deutsche Bank analysts said in a note that the upgraded outlook on the dollar and recommended a bet on the euro “compared to the unencumbered optimism at the start of the year, a twilight zone for markets as 2021 draws to a close.”

“The dynamics of persistently stagflation – lower growth but hawkish Fed – leave little room for a downward trend for the dollar,” they said.

Sterling held a private defeat overnight as concern about the economic impact of gas shortages and a rush on fuel sent it down 1.2% against the strong dollar, its biggest daily drop in more than a year.

The Australian and New Zealand dollars also suffered, with the kiwi hitting a one-month low. Next week’s central bank meetings loom in both countries and swap pricing points to the RBNZ after the Norges Bank and rate hikes.

“NZD/USD remained stuck around $0.7000, as the impact of the hawkish RBNZ was offset by increased expectations for the Fed,” said Emre Spezer, an analyst at Westpac.

The kiwi was last at $0.6947 and the Australian dollar at $0.7248.

Ahead of Wednesday, Japan’s ruling party votes on a new leader who is almost certain to become the country’s next prime minister.

European Central Bank (ECB) President Christine Lagarde, Federal Reserve Chairman Jerome Powell, Bank of England Governor Andrew Bailey and Bank of Japan Governor Haruhiko Kuroda are members of the ECB Forum.

HF