It’s 'Foolish' to Fight Dollar Dominance as Rally Picks Up Speed
When Nick Twidale reaches his desk in Bridge Street each morning, in the heart of Sydney’s financial district, he’s greeted by a seemingly endless slew of dollar buy orders.
“It’s the easiest trade in FX,” said Twidale, a 25-year markets veteran and Asia Pacific chief executive at broker FP Markets. “Until there’s a dramatic shift in fundamentals and rhetoric with the Fed, you’d definitely be foolish to sell the dollar when the whole world is so nervous.”
The dollar’s resurgence has manifested in dramatic drops across every major currency this past week as concerns about a hawkish Federal Reserve and the potential for a global recession drove demand for the ultimate haven. The euro sank below parity, South Korean authorities verbally intervened to stop the won extending a 13-year low and hopes of a yen recovery were dashed as it tumbled back toward the key 140 per dollar level.
The rally looks to have plenty more room, with risks of hawkish comments from Fed Chair Jerome Powell at the Jackson Hole symposium later this week expected to turbocharge a rush for the US currency.
“The dollar smile seems intact,” wrote Win Thin, global head of currency strategy at Brown Brothers Harriman & Co., referring to the theory the greenback strengthens during periods of both US economic outperformance or recession. If “risk-off impulses ebb, the dollar should continue to benefit from the relatively strong US economic outlook and heightened Fed tightening expectations.”
A Bloomberg gauge of the dollar was little changed by 11:37 a.m. in London on Tuesday.
Potential drivers for more US currency gains are numerous and lie on both sides of the dollar smile equation. One is bets on weakness in major peers, from Europe’s faltering currencies to Japan’s struggling haven yen.
Hedge funds have already increased their net-short bets on the euro to a three week high while bearish wagers on the pound climbed to the highest since March 2020, according to the latest Commodity Futures Trading Commission data. Asset managers ratcheted up their yen shorts at the same time.
The euro’s most bearish euro forecaster for year end, JPMorgan Chase & Co., sees the common currency falling to $0.95 by December, data compiled by Bloomberg showed. RBC Capital Markets sees the pound sliding more than 5% over the same period to the $1.11 level, while Commonwealth Bank of Australia expects the Aussie to drop to 65 US cents.
On a more immediate basis, “price action will continue to reflect positioning ahead of FOMC Chair Powell’s speech at the annual Jackson Hole retreat,” said Carol Kong, strategist at CBA. “We expect euro-dollar to trade below parity most of the week.”
The dollar’s meteoric rise is even more damaging for emerging markets, whose central banks are collectively burning through the equivalent of more than $2 billion of foreign reserves every weekday to bolster their currencies.
India, Thailand and South Korea have seen their reserves plummet by a combined $115 billion this year alone. China’s yuan, seen by many as an anchor to sentiment and currencies in emerging markets, is sliding toward the key 7 per dollar level as Covid restrictions and a slowing economy bite.
As the US yield curve inverts further -- a closely watched sign of a pending recession -- emerging currencies including the won, Hungarian forint, Brazilian real and Mexican peso are among the most vulnerable to plumb new lows, according to TD Securities.
“The combination of higher rates and higher US dollar has been exerting significant pressure on risk sentiment,” said Alvin Tan, strategist at RBC Capital Markets in Singapore. The dollar’s strength “can continue to run through the rest of the year and probably into early next year.”
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