The U.S. dollar traded at its highest levels this year on Wednesday after rallying with U.S. yields on Tuesday. Traders were concerned that the Federal Reserve would start to withdraw policy support while global growth slows, turning to the safe-haven greenback to avoid losing money. Overall, the dollar index jumped to 93.891, which is an 11-month high.
The Japanese yen is also a safe haven. But it is sensitive to U.S. yields because higher rates can draw flows from Japan. On Wednesday, it hit an 18-month low of 111.685 per greenback before slightly rebounding to 111.47.
Thus far, the Yen showed almost no reaction to the election of Fumio Kishida as leader of Japan’s ruling Liberal Democratic Party (LDP). That decision virtually ensures that he will become the country’s next prime minister.
Meanwhile, the Euro tumbled down to $1.1657, reaching its lowest level since November 2020. The British Pound also shaved off its gains on Tuesday due to worries over the economic impact of a shortage of gas, as well as a scramble for fuel. The sterling extended losses on Wednesday as well, dropping to its lowest level since January at $1.3505.
Kimberley Mundy, a strategist at CBA, noted that they expect the dollar’s strength to continue for the remainder of the year due to the outlook for policy tightening. An additional rate hike may happen by late 2022, as well.
U.S. Treasury yields have soared in recent days as tapering time is approaching and inflation starts to look stickier than investors first thought. On Wednesday, the benchmark 10-year yield lowered slightly. But at 1.5132%, it is still higher by some 20 basis points in a week.
What about the Chinese Yuan and commodity currencies?
Thus far, the Chinese yuan has been relatively resilient in the face of the U.S. currency’s strength. However, it plummeted on Wednesday after Japan’s giant Government Pension Investment Fund announced that it wouldn’t buy Chinese government bonds.
Meanwhile, energy prices are rising, and traders are still concerned about China’s growth outlook. It seems China’s growth is in jeopardy due to power outages hitting output and a messy collapse of developer China Evergrande.
MSCI’s emerging markets currency index experienced its sharpest plunge in three weeks overnight. It extended its decrease on Wednesday, tumbling to a one-month low.
Jane Foley, the senior FX strategist at Rabobank in London, noted that the greenback is unlikely to retreat significantly, at least until the trader’s confidence in emerging markets has been lifted. She added that this would be more difficult to achieve, considering that fears of higher energy prices and firmer U.S. rates dominate the Forex market. Thus, Rabobank’s 6-month EUR/USD target of 1.16 looks set to be hit sooner than it had been anticipating.
In Asia, the Australian and New Zealand dollars struggled to remain in the green. The kiwi tumbled to a fresh one-month low of $0.6936, while the Aussie steadied at $0.7239.
Investors are waiting for the Central Bank meetings due in the next week in both countries. They expect the Reserve Bank of New Zealand to follow the Norges Bank’s example and lift its rates. Westpac analyst Imre Speizer noted that the NZD/USD pair is still stuck around $0.7000, as increasing expectations of the Fed offset the effect of the hawkish RBNZ.
Later today, Fed Chair Jerome Powell, European Central Bank (ECB) President Christine Lagarde, Bank of Japan Governor Haruhiko Kuroda, and Bank of England Governor Andrew Bailey will speak at an ECB forum.
How did Emerging Market currencies fare?
South Korean and Japanese stocks declined by 2% on Wednesday, along with other stocks in the region. However, the Thai baht suffered the most among the currencies ahead of a central bank meeting due later in the day. Financial markets worry about the broader impact of electricity shortages in China. The latter has seriously disrupted the working process in factories owned by suppliers to global companies such as Tesla and Apple.
The baht plummeted down by 0.4% on Wednesday, hovering at its lowest level since July 2017. Thus far, it remains Asia’s worst-performing EM currency in 2021. Overall, the currency has lost over 11% against the greenback this year.
Investors widely expect the Bank of Thailand to hold its key interest rate at a record low. Due to a coronavirus outbreak in July and August, border restrictions have severely damaged its tourism-reliant economy.
Today Thailand’s finance minister announced that the government needs to keep monetary policy accommodative. However, Mizuho Bank analysts noted that this would be a close call. It reflected a deliberated abstinence from further easing instead of a complete absence of motivations to cut or effect further stimulus. They also added that with THB depreciation risks rising, a rate cut might disproportionately compromise the bank compared to realizable economic support.
Meanwhile, the South Korean benchmark dropped to its lowest level since the end of March. The won also decreased for the seventh consecutive session as the greenback rallied to its strongest level for the year.