Dollar Rally Ahead of Fed

On Monday, the dollar rose to a month high in Asia. An impending disaster at indebted developer China Evergrande contributed to an already tense environment.

Investors are expecting the Federal Reserve to take another step toward tapering this week.

Currency

The euro EUR=EBS sank 0.1 percent to $1.1710, its lowest since late August. Trade was limited by holidays in Japan, China, and South Korea. The Australian dollar AUD=D3 sank 0.5 percent to a three-week bottom of $0.7227, while sterling GBP=D3 and the New Zealand dollar NZD=D3 also plunged to multi-week lows as the greenback rose. The dollar index =USD increased 0.1 percent to 93.356, its highest level since August 23.

The US dollar is experiencing a bit of a bounce,” said Westpac analyst Imre Speizer. The yen JPY=EBS maintained steady, rising 0.1 percent to 109.88 per dollar. At the same time, equity markets fell on fears that an Evergrande collapse might spark a more significant crisis. HK is in debt to the tune of $300 billion. It has an $83.5 million bond interest payment due on Thursday and announced on Sunday that it had begun repaying confident investors with real estate.

Sterling was down 0.1 percent at $1.3709 at 0330 GMT, while the kiwi was down 0.14 percent at $0.7024. The dollar gained ground versus the currencies of emerging nations while cryptocurrencies sank. 

Fed Focus

This week sees a slew of central bank meetings, but traders’ primary focus is on the Fed, where hopes for a tapering signal keep the dollar bought.

The Fed closes a two-day meeting on Wednesday, expecting that it will remain with broad tapering plans for this year, but would not provide details or a schedule for at least a month. Rising US rates, which rose for the fourth week in a row at the 10-year tenor last week US10YT=RR, suggest the possibility of a hawkish surprise or a shift in estimates to show hikes as soon as 2022, both of which might strengthen the dollar.

Dollar bulls would be hoping for the dot plot to reflect a 2022 lift-off, according to analysts at Singapore’s OCBC Bank. It would be an extension of the hawkish-Fed, dollar-positive narrative, which had peaked in August. The Bank of England is anticipated to leave policy settings intact. However, if the bank adopts a hawkish tone or more members push for asset purchase tapering, traders see the potential for pound gains.

The Bank of Japan, which has remained firmly dovish, is unlikely to change policy on Wednesday. However, Norway’s Norges Bank is poised to become the first G10 central bank to hike interest rates a day later.

On Monday, the Norwegian crown NOK= fell with oil and surging to a three-week low of 8.7499 per dollar.

The oil-sensitive Canadian dollar CAD=D3 was also under pressure ahead of Monday’s election, which polls show will give incumbent Prime Minister Justin Trudeau an advantage.