Risk aversion boosts US dollar

Higher yields, safety first, sends US dollar higher

The dollar index soared overnight, driven by risk aversion, higher yields and ramped-up hiking expectations from the FOMC this week. The dollar index finished 0.97% higher at 105.20, easing slightly in Asia to 105.10. Asia seems content to adopt a wait-and-see attitude among the major currencies today after the ructions overnight. Having taken out resistance at 105.00, the technical picture remains constructive. The dollar index has nearby support at 105.00 and then 104.00, with nothing on the charts until the 108.00 area.

EUR/USD slumped again overnight, finishing 1.05% lower to 1.0420 before edging slightly higher to 1.0420 in Asia. With the ECB only likely to hike by a total of 0.50% by September, with all bets off as far as the Fed goes, the single currency remains under serious pressure. Arguably the economic picture looks much darker for Europe than the US anyway. The fact that EUR/USD never seriously attempted to regain its multi-decade breakout around 1.0800 suggests that a medium-term high is now in place. EUR/USD’s last support ahead of parity is at 1.0350, with resistance at 1.0600.

Sterling fell by 1.50% to 1.2130 overnight, continuing its grim week. US dollar strength aside, the UK published soft GDP data overnight and seems intent on provoking an economic conflict with the European Union over the Northern Ireland Protocol. Markets are also still expecting only a 0.25% hike from the Bank of England this week. That should all ensure the pressure stays on sterling, despite climbing 40 points to 1.2170 on short-covering in Asia. The next support is at 1.2070 and then 1.2000.

USD/JPY continues to top out at 135.00, despite a massive increase in US yields over the past two sessions. Yen repatriation and perhaps some fears that the Bank of Japan is going to do “something” regarding monetary policy this Friday seem to be adding a note of caution to USD/JPY longs. USD/JPY is ranging between 134.00 and 135.00 for now with risks still skewed to the upside as the Bank of Japan aggressively intervenes on the yield curve this week.

Risk aversion sentiment pummelled AUD/USD and NZD/USD overnight, both falling by over 1.50%. Some stability in US equity futures in Asia today has allowed them both to stage a modest recovery, gaining 0.45% to 0.6960 and 0.6285 respectively. The technical picture remains challenging for both, which are at the mercy of swings in sentiment by global investors.

USD/Asia rose overnight, but by and large, Asian currencies are proving quite resilient to the US dollar rally. USD/MYR, USD/PHP, and USD/INR showed only modest gains, while USD/KRW rose 0.85% to 1290.00 and USD/CNH rose 0.70% to 6.7815 before giving all those gains back today, falling to 6.7410. Neutral PBOC CNY fixes are adding some stability, but I suspect there are a few regional central banks around on the topside selling US dollars. Some cracks are showing on the periphery though, USD/IDR has risen from 14,420.00 to 14,715.00 over the last couple of sessions. The technical picture suggests that further Asian currency weakness remains a case of when, and not if.

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