The U.S. dollar is on a tear, hitting historic highs versus major rivals and sending ripples through global financial markets as investors see the Federal Reserve pressing interest rates higher in its bid to get inflation back under control.
“It comes as no surprise that the dollar hit a fresh record high on both safe-haven flows from global economic weakness and as a resilient U.S .economy paves the way for the Fed to remain aggressive,” said Edward Moya, senior market analyst at Oanda. “King dollar has awoken from a nap and that could spell a lot more pain for the European currencies.”
- The dollar was up 0.8% versus the Japanese currency USDJPY at 140.03 yen, trading above 140 for the first time since August 1998, according to FactSet.
- The euro EURUSD slumped back below parity, dropping 1.1% to fetch 99.46 U.S. cents.
- The British pound
GBPUSD,
-0.29%
dropped 0.7% to trade at $1.1542, its weakest since March 2020. - The dollar was up 0.2% versus the Chinese yuan USDCNY, trading near a more-than-2-year high.
- Meanwhile, the ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals that is weighted heavily toward the euro, was up 0.9% at 109.69 after trading just shy of 110 — its strongest since 2002.
A lockdown of Chengdu, a city of 21 million by Chinese authorities, stirred global growth worries and safe-haven interest in the dollar, analysts said. The dollar was bolstered further Thursday morning after data showed first-time jobless claims fell last week to a nine-week low of 232,000, showing no sign that a slowing U.S. economy is triggering widespread layoffs.
The rally accelerated after the Institute for Supply Management said its manufacturing index held steady at 52.8% in August, as new orders and employment turned positive again and inflation waned — a reading higher than 50% signals expansion. Economists polled by The Wall Street Journal had forecast the index to slip to 51.8%.
“It’s very much a goldilocks report if you’re a U.S. dollar bull. Not so much for anything else, which has continued to get absolutely rinsed,” said Michael Hewson, chief market analyst at CMC Markets, in a note.
U.S. stocks were mixed in late afternoon trade, having suffered a four-day losing streak following Fed Chair Powell’s Aug. 26 speech, warning that economic pain may be in the offing as the central bank battles inflation.
The Dow Jones Industrial Average
DJIA,
was 42 points, or 0.1%, while the S&P 500
SPX,
shed 0.1% and the Nasdaq Composite
COMP,
dropped 0.7%. Treasury yields jumped, with the 2-year rate
TMUBMUSD02Y,
topping the 3.52% level and the 10-year yield
TMUBMUSD10Y,
rising more than 13 basis points to trade near 3.265%. Yields and debt prices move opposite each other.
“The Fed’s aggressive rate hikes have driven moves in the major currency pairs as German-U.S. and Japan-U.S. rate spreads widen. EUR and JPY are the two largest components of the dollar (DXY) index, and the prospects of more aggressive Fed tightening would only exacerbate these macro trends,” said analysts at PGM Global, a Montreal-based research firm,, in an Aug. 26 note. “Meanwhile, the Fed pivot is being priced out of 2023, reinforcing our view that a stronger broad USD is still in the path of least resistance,” they wrote.
The surging dollar has been a weight on commodities, with the U.S. crude benchmark
CL.1,
dropping 3.5% to trade above $86 a barrel, while gold
GC00,
lost 1% to trade near $1,709 an ounce.
Opinion: Will the dollar’s surge end in whiplash?
The PGM Global analysts said that the dollar rally could be sowing the seeds for further FX volatility as foreign central banks deplete currency reserves, particularly dollar holdings, in an effort to stabilize their own currencies.
“There has been a desire among central banks and sovereign-wealth funds to diversify foreign reserves into gold and other stable currencies. However, this slow-moving de-dollarization trend has not led to a weaker USD,” the analysts said.
“Indeed, quite the opposite, as the macro factors line up much too strongly in favor of the USD. Thus, prematurely selling USD reserves could be a costly policy error and exacerbate FX and equity volatility,” they wrote.
The 16 largest holders sold a combined $672 billion of reserves year-over-year through July, PGM Global said, citing International Monetary Fund data. “As the Fed mops up USD liquidity, the U.S. dollar ‘wrecking ball’ looks like it is still gathering pace,” they wrote.
Source: https://www.marketwatch.com/story/why-an-epic-u-s-dollar-rally-could-be-a-wrecking-ball-for-financial-markets-11662057375?siteid=yhoof2&yptr=yahoo