The dollar is ruling global markets in the dash for safety.

As stocks, bonds and commodities plummeted on Monday, an index of the dollar continued its relentless advance to a two-year high. The currency is an indisputable haven in a market that’s being thrashed by accelerating inflation, worries about a recession and China’s Covid lockdowns.

Market positioning data shows the dollar is drawing in more adherents. Hedge funds boosted long bets to the highest this year, according to data from the Commodity Futures Trading Commission in the week to May 6.

“It doesn’t look like this trend will turn any time soon,” said Chris Turner, head of currency strategy at ING Groep NV. “You’ve got the Fed, you’ve got the renmimbi and you’ve got Europe, and it’s hard to bet on any of those issues changing in the near term.”

As a consequence, many of the dollar’s global counterparts are falling to levels that haven’t been seen in years. The pound slid to a fresh 2020 low, the yen dropped to the weakest since 2002, while India’s rupee slumped to a record low.

The Bloomberg Dollar Spot Index added 0.2 as of 8:20 a.m. in New York. U.S. Treasuries extended a slide, driving the yield on five-year notes to the highest since 2008.

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 weak export reading comes on the heels of a report last week showed manufacturing activity plunged to its worst level since February 2020. Currencies linked with Chinese growth struggled, with both the Australian and New Zealand dollars slumping around 1% on the day.

Developing-nation currencies are also 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, a 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. 

Traders will next be looking to Wednesday’s monthly U.S. consumer-price data, given the pace of inflation in April is expected to slow in a Bloomberg survey. That could spark a re-think in the market about how aggressive the Fed’s tightening path will be, according to Simon Harvey, head of currency analysis at Monex Europe.

“All it takes a minor slip in the core CPI reading for markets to go back to the drawing board,” said Harvey. “Especially because of the aggressive positioning we’ve been seeing, it only needs one slip for markets to want to pullback in Treasuries, money market pricing and the dollar,” he said, adding a weak reading could spark a dollar retreat toward 130 versus the yen.

Source:
courtesy of BLOOMBERG

by Ruth Carson and Naomi Tajitsu

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