The dollar strengthened versus all of its major peers as China’s Covid lockdowns, accelerating global inflation and the worsening economic outlook boosted demand for the U.S. currency as a haven.

A gauge of the greenback advanced for a third day after Friday’s U.S. payroll numbers pushed up Treasury yields, giving investors more reason to funnel funds into the world’s largest economy. Adding to the dollar’s attraction is the hawkish Federal Reserve, which has committed to a series of half-point rates hikes in coming months.

The dollar’s rally is sending it to new highs against many of its global counterparts. The Aussie slid below 70 U.S. cents for the first time since January, the yen dropped to the lowest since 2002, while India’s rupee slumped to a record.

“This period of dollar strength will endure, in large part based on our Fed view,” John Velis, a strategist at Bank of New York Mellon Corp., in New York wrote in a research note. “With the forward curve still pricing what we think is too low of a terminal rate, an eventual repricing higher of those rates should continue to support the dollar.”

The Bloomberg Dollar Spot Index advanced 0.5%, extending its gain over the past month to around 4%. The U.S. currency rose more than 1% against the Aussie, Hungarian forint and the kiwi. The Treasury 10-year yield climbed to 3.15% Monday, the highest level since November 2018.

Many of the concerns about slowing global growth are being driven by China. The nation’s Premier Li Keqiang warned on the weekend of a “complicated and grave” employment situation as Beijing and Shanghai tightened curbs on residents in a bid to contain Covid outbreaks in the country’s most important cities.

China’s export growth slowed to 3.9% in dollar terms in April from a year earlier, the weakest pace since June 2020, customs data showed Monday. A report last week showed manufacturing activity plunged to its worst level since February 2020.

‘Capital Outflows’

Developing-nation currencies are being pummeled due to the threat of funds being pulled from their stock and bond markets as U.S. yields rise.

“Fragile” emerging economies with current-account deficits including Turkey and nations in Africa are particularly vulnerable, said Alvin Tan, strategist at Royal Bank of Canada in Hong Kong. A stronger dollar “encourages capital outflows from emerging-markets and tightens EM financial conditions,” he said. 

Market positioning data shows dollar is drawing in more adherents all the time. Hedge funds boosted long bets on the currency to the highest level this year in the week to May 6, according to data from the Commodity Futures Trading Commission compiled by Bloomberg.

“With U.S. yields still heading higher and growing concerns about slowing global growth especially with China still pursuing a strict Covid Zero policy, the dollar continues to strengthen in this environment as it is seen as a safe haven,” said Khoon Goh, a strategist at Australia & New Zealand Banking Group Ltd. in Singapore.

Source:
courtesy of BLOOMBERG

by Ruth Carson

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