The US dollar rally continues at pace

Dollar shows gains as US yields rise

The US dollar continued to march higher overnight, initially on the rise in US yields, while notably maintaining that strength after they retreated. Month and quarter-end flows are likely to be playing their part, as previously mentioned, but the rally by the dollar index overnight is notable. The dollar index rose 0.38% to 93.30 overnight, rising to 93.40 today in Asia. The index is now well clear of its 200-day moving average (DMA) at 92.50, with the technical picture suggesting further gains to 94.30 ahead.

USD/JPY rose 0.50% to 110.35 overnight, and USD/JPY has climbed another 0.43% to 110.80 in Asia as the potentially widening yield differential has seen USD/JPY rise 200 points in the last week. USD/JPY’s technical picture is overbought in the short-term, suggesting a pause from here, but any dips should be keenly sought for a rally to 112.00.

Although the sterling continues to hold its ground, mainly because Gilt yields are also rising, EUR/USD was crushed once again overnight. EUR/USD broke below its multi-month support line in early March and is well and truly in correction territory, weighed down by virus and growth concerns. EUR/USD fell 0.40% to 1.1715 overnight, edging lower to 1.1705 in Asia. It now targets a multi-day bottom at 1.1600, with failure opening up deeper losses to 1.1200.

USD/CNY was fixed by the PBOC at 5.5713 today, as expected. A consistent PBOC that is also maintaining a neutral credit policy via a balanced repo market has limited the fallout in other Asian currencies thus far. However, some stresses are beginning to appear, though, with USD/INR rising by 0.80% to 73.490 overnight.

The overnight rally saw USD/INR rise through its 100-DMA and test its 200-DMA at 73.7000 intra-day. The Indian rupee has benefited from hot money inflows in recent months. Still, if US strength elsewhere continues and the Covid-19 situation deteriorates, those flows could rapidly reverse, setting off more INR weakness. Higher oil prices and a stagflationary environment further complicate the rupee’s picture.

Along with India, Indonesia is another Asian country I have flagged as having an elevated risk to rising US yields and US dollar strength. USD/IDR has risen 0.70% to 14,567.00 today, breaking through the important 14,500.00 level. With current account pressures and high levels of foreign-denominated debt like India, combined with fragile domestic demand that also leaves the IDR at elevated risks to a rising dollar. Neither country has room to ease policy now (like most of Asia) if US dollar strength persists. The situations in India and Indonesia are worth keeping an eye on, especially if China decides to let the yuan weaken at an accelerated pace.

As with equities, the US dollar’s momentum will be driven by the Biden infrastructure package outcomes tonight, with any resulting rise in US yields, translating into accelerating dollar strength.

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