The US dollar flexes its muscles

Dollar piggybacks on US bond yield rise

The rise in US bond yields overnight led to US dollar strength, notably amongst the previously pimped-up commodity currency grouping. The US 10-year yield finished the day 17 points higher at 1.53% overnight, a very significant gain. Notably, the Australian dollar staged a bearish outside reversal day, implying further losses to 0.7700 in the short-term. Sterling unwound the breakout of its multi-month bullish channel overnight, falling 0.30% to 1.3970 today. Sterling could well retreat to the low 1.3800’s over the next couple of days.

The dollar index has climbed 0.25% to 90.37 this morning, still not far distant from support around 90.00. This evening, robust PCE data from the US could awaken currency markets from their side-line slumber and see US dollar strength accelerate more broadly.

Asia currencies remain resolute, easing only slightly against the greenback today as the PBOC USD/CNY fixing increased only modestly to 6.4713 today. As discussed above, a prolonged rise in US yields will pressure Asian currencies to weaken or face tightening domestic monetary policy to support them. A situation no central banks except China and South Korea would wish to entertain.

Amongst the regional grouping, the Indonesian rupiah is amongst the most vulnerable to further US dollar strength, significantly as it slipped in an official rate cut last week. Ominously, USD/IDR has risen by 1.10% to 14,250.00 today. With the domestic economy still very weak, the last thing Indonesia needs is an effective tightening caused by a weaker currency. I expect Bank Indonesia to be around “smoothing,” but Indonesia is a window to pressures in other Asian countries if the bond tantrum runs for an extended period.

For now, Asian currencies are being spared the worst thanks to China’s inclination to keep the yuan firm. Any signs of a change in that stance could spark a rush for the exit door across the region.

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