On Wednesday, the dollar traded around its highest levels of the year. It was driven higher by US yields and benefiting from investor jitters over the Federal Reserve beginning to withdraw policy support just as global growth headwinds gathered.
Overnight, the dollar surged sharply, pushing the dollar index to an 11-month high of 93.805. Early in the Asian session, it was trading at 92.728, just below that level.
Treasury yields in the United States have risen, with the benchmark 10-year rate rising 25 basis points in five sessions to 1.5548 percent, as the Fed prepares to taper before the end of the year. Inflation begins to appear stickier than previously imagined. The Japanese yen is sensitive to US yields because higher rates can encourage outflows from Japan. It has dropped more than 2% in five sessions and has touched its lowest level since February. Along with the Fed’s aggressive tone, energy prices are soaring. Concerns about China’s development forecast are growing, which is now under threat from a dramatic collapse at developer China Evergrande and continuous power outages that reduce output.
“It is a twilight zone for markets as 2021 approaches, compared to the unconstrained optimism at the start of the year,” Deutsche Bank strategists wrote in a note that improved predictions on the dollar and advocated a bet against the euro.
The euro sank to a one-month low overnight. It is currently trading at $1.1684. Euro is challenging significant support levels between its 2021 low of $1.1664 and its November 2020 low of $1.1602. Stagflationary characteristics – weaker GDP but a hawkish Fed – provide little room for a dollar downtrend,” they wrote.
Sterling took a 1.2 percent hit overnight as investors worried about the economic implications of a gas scarcity and a hunt for gasoline. This causing it to decline 1.2 percent against a stronger dollar, its most significant day drop in more than a year.
The Australian and New Zealand dollars also took a hit. The Kiwi fell to a one-month low. Both countries’ central banks will meet next week, with swaps pricing pointing to the Reserve Bank of New Zealand following Norges Bank and raising rates.
NZD/USD remains stuck around $0.7000, as the influence of the RBNZ’s hawkishness is mitigated by rising Fed expectations.
The New Zealand dollar recently traded at $0.6947, while the Australian dollar traded at $0.7248. On Wednesday, Japan’s ruling party will elect a new leader, probably becoming the country’s next prime minister.