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Dollar ascends on China COVID-19 fears, Fed rate hike pace

Dollar ascends on China COVID-19 fears, Fed rate hike pace

Euro, Hong Kong dollar, US dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, Jan 21, 2016. (File photo: Reuters/Jason Lee)

HONG KONG: The dollar climbed to around a two-year high against the euro and an 18-month high versus the pound as fears about the economic impact of China's COVID-19 lockdowns and an aggressive pace of US rate hikes sent investors scrambling for safety.

China's offshore yuan was steadier in early trading, however, at 6.5770 per dollar after the People's Bank of China said late on Monday (Apr 25) it would cut the amount of foreign exchange banks must hold as reserves.

That helped the currency to recover from a year low of 6.609 per dollar on Monday, hurt by fears about China's economic growth.

The dollar index, which measures the greenback against six main peers, was at 101.58, after jumping 0.58 per cent on Monday and hitting a two-year peak of 101.86.

It has gained 3.3 per cent so far this month, which would be its largest month of gains since November 2015.

"Further (dollar index) upside remains a good bet. China growth risks are rising as authorities pursue an aggressive COVID campaign, conditions around Ukraine remain volatile and 'Fedspeak' remains as hawkish as ever," said analysts at Westpac in a note.

China's financial hub of Shanghai has now been under strict lockdown to fight COVID-19 for around a month, and a Beijing official said late on Monday that a mass testing campaign there will be expanded from the city's most populous district to another 10 districts and one economic development area.

Hawkish comments by various policymakers last week also raised the risks of aggressive interest rate policy tightening by global central banks. The most significant of these came from the US Federal Reserve which markets expect to raise rates by a half point at each of its next two meetings.

As well as driving investors to the dollar, these fears have caused equity markets to sell off heavily, and US Treasury yields to fall. 

The euro was at US$1.0723 a fraction above the overnight low of US$1.0697, its weakest since March 2020, as market nerves trumped any optimism from the re-election of French President Emmanuel Macron.

The pound was at US$1.2744, having hit its lowest since September 2020 overnight. US futures market data show that funds have amassed their biggest wager against the pound since October 2019, a bet now worth close to US$5 billion.

Once the market favourite, the Australian dollar was at US$0.7177, and hit a two-month low overnight, suffering particularly because the China lockdowns have weighed on commodity prices.

The dollar did fall 0.4 per cent versus the yen, however, to 127.62. The Japanese currency has managed a very slight recovery this week from last week's 20-year low of 129.40.

Bitcoin was a little firmer at US$40,500, and ether was at US$3,000.

Researchers at crypto liquidity provider B2C2 said crypto market trading was currently correlated closely with equity markets and as there is "no crypto theme so far to override weakness from rates/growth/inflation/war concerns".

Source: Reuters/ng

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