The US dollar remains firm

Dollar maintains upward momentum

A fall in US long-dated yields was offset by a rise in the short-end yields overnight as markets continued to price in the Fed taper and higher near-term inflation expectations. The curve flattening allowed the US dollar to maintain its upward momentum aided by risk hedging buying ahead of US inflation data tonight and nervousness about growth outlooks in the Q3 earnings season releases.

The dollar index climbed 0.16% to 94.51 overnight before unwinding those gains this morning, retreating 0.16% to 94.35. The passing of the temporary extension of the US debt ceiling legislation through the House of Representatives this morning seems to have temporarily relieved some of the nerves that have been supporting the US dollar. That is likely to be short-lived and a close well above 94.50 this evening will signal the next leg higher for the US dollar. For now, resistance is holding at that level, but the pullbacks are getting shallower, hinting that a break higher is coming.

EUR/USD and GBP/USD have unwound overnight losses, rising 0.18% to 1.1550 and 1.3615 and both remain rangebound with a bias to the downside. EUR/USD remains the more vulnerable after an ECB council member suggested the ECB would fall short of its 2023 inflation targets. Yield differentials will weigh on the single currency. The Australian and New Zealand dollars probed the topside overnight, but both ultimately unwound those gains as heightened risk sentiment globally capped gains. Both will need soft US inflation print tonight to continue their recovery.

In Asia, the PBOC left the USD/CNY steady at 6.4612 and continues to show little interest in weakening the currency. It looks like the Bank of Korea intervened yesterday to cap gains in the USD/KRW ahead of the important 1200.00 level. A pattern of behaviour which I expect to see much more of by regional central banks as the US dollar continues rising in Q4. A lower US dollar has seen Asian FX rally modestly this morning, but overall markets remain nervously watching interest rate and inflation developments in the US.

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