The US dollar stood strong on Tuesday and almost everything else slipped into the red as traders braced for aggressive US Federal Reserve interest rate hikes and a likely recession.
The dollar index scaled a two-decade peak of 105.29 on Monday and held at close to that level in Asia Tuesday as the currency gained with yields and investors seek shelter from the storm.
Markets have scrambled to bet on rapid-fire Fed rate hikes in the wake of an unexpectedly hot inflation reading on Friday. Consecutive 75 basis point rate rises in June and July are close to fully priced, sending shockwaves across asset classes.
The dollar has hit one-month highs on the euro, Australian dollar, New Zealand dollar, Swiss franc and Canadian dollar and it made a fresh one-month top of $1.0397 per euro on Tuesday.
Sterling sat by a two-year low at $1.2163 as the Fed is seen outpacing the Bank of England, which is expected to deliver a 25 bp hike on Thursday.
Even the Norwegian krone, which has been supported by firm oil prices and a central bank that began hiking last year, touched a two-year low of 9.9295 per dollar.
Dollar, Stagflation’s Hedge of Choice
“The dollar seems to be the stagflation hedge of choice,” Bank of Singapore strategist Moh Siong Sim said.
“The market is starting to turn a lot more fearful,” he said. “On the inflation front, things do not look good and the Fed needs to respond.”
The Aussie steadied at $0.6945 through the Asia session, stabilising with S&P 500 futures, but that is still close to a test of its May trough at $0.6829 and analysts remained cautious and trade skittish.
Nerves about official intervention also gave brief respite to the yen, but it was soon on the back foot again after the Bank of Japan expanded a round of bond purchases to knock the 10-year government bond yield back to its 0.25% cap.
It last traded at 134.66 per dollar after hitting a 24-year low of 135.22 on Monday.
“Given Wednesday may see the Fed go 75bps and flag more, while the BOJ on Friday will only flag more bond buying, JPY is not going to stay at these levels for long. It’s going to get much, much worse,” Rabobank strategist Michael Every said.
High Chance Of 75 bps Hike
The Fed concludes a two-day meeting on Wednesday and CME’s FedWatch tool shows markets priced for a 93% chance of a 75 basis point hike, which would be the biggest since 1994.
Goldman Sachs tips 75 basis point moves at both the June and July meetings and rates at 3.25-3.5% by year end.
Futures show expectations of nearly 200 bps of tightening by September and the two-year Treasury yield is up about 60 basis points since Thursday’s close at 3.4023%.
The 10-year yield is below that, at 3.3598%, in a signal that investors fear the rapid tightening path will hurt growth and possibly bring on a recession.
“The policy challenge is that the Fed has no idea how much monetary tightening is needed and will only find out it has done too much, long after the event,” Societe Generale strategist Kit Juckes said.
Dollar gains have punished emerging market currencies, and the flight from risky investments has battered cryptocurrencies.
Bitcoin is down 30% in June and came close to dropping below $20,000 in Asia before steadying around $22,000, while ether also tested resistance around $1,000.
India’s rupee hit a record low on Monday.
South Korea’s won touched its lowest level since March 2020 on Tuesday at 1,292.5 per dollar, though it was kept from further losses by official hints at intervention and dealers’ suspicion that authorities were selling dollars.
The Malaysian ringgit, Thai baht and Indonesian rupiah made multi-year lows.
- Reuters with additional editing by Sean OMeara