Dollar soars to new two-year high on growth fears and rate bets
The dollar roared to a new two-year high on Tuesday and the euro hit its weakest since March 2020 as concerns about the economic impact of China’s COVID-19 lockdowns and aggressive U.S. interest rate hike expectations boosted the greenback.
With markets facing a multitude of risks including central banks tightening policy just as economic growth momentum slows, investors have been buying up dollars. The dollar index, which measures the U.S. currency against a basket of rivals, has risen 6.5% so far in 2022. It has gained 3.65% so far this month, which would be its largest monthly gain since January 2015.
On Tuesday the index rose another 0.2% to 101.92.
The euro dropped 0.3% to $1.068, its weakest since March 2020 when markets were tumbling on concerns about the spread of COVID-19.
The euro has been whacked by concerns about the impact of the war in Ukraine on the European regional economy but also by expectations the European Central Bank will move much slower than the Federal Reserve in raising interest rates.
“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 ‘Fed-speak’ 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 for around a month, while Beijing overnight ramped up plans for mass-testing of 20 million people and fuelled worries about a looming lockdown.
China’s offshore yuan was slightly weaker in early European trading at 6.583 per dollar, but off the 17-month low of 6.61 hit on Monday.
The yuan began to recover after the People’s Bank of China soothed some market fears by saying late on Monday that it would cut the amount of foreign exchange banks must hold as reserves.
The British pound dipped 0.1% to $1.2722, having hit its lowest since September 2020 overnight.
The Australian dollar at $0.7182 was unchanged but above its two-month low reached overnight after China lockdowns weighed on commodity prices.
The dollar fell 0.2% against the Japanese yen , to 127.85. The yen has managed a very slight recovery this week from last week’s 20-year low of 129.40.
Investors will be watching out for U.S. consumer confidence numbers due later.
“Will today’s release of April Conference Board consumer confidence have any impact on the pricing of the Fed cycle? We suspect not. DXY [the dollar index] may now be due some consolidation in the 101-102 area, but the trend towards testing the March 2020 high near 103 remains intact,” ING analysts said.
Bitcoin was 0.56% firmer at $40,668, and fellow cryptocurrency ether was at $3,008.