Dollar heads for best run in year in bet on Fed delaying cuts
The dollar is headed for its biggest rally in over a year on expectations US interest rates will stay high for longer and as investors pile into the haven currency amid escalating tensions in the Middle East.
The Bloomberg Dollar Spot Index climbed for a fifth day Tuesday, taking gains to around 2%, the biggest advance since February 2023. China’s move to weaken its daily reference rate for the yuan added to the selling pressure across emerging markets.
Traders are betting the Federal Reserve will only begin easing in September, compared with July a week ago. The repricing comes after a string of surprisingly strong US inflation readings that are shaking up the prevailing narrative for markets and stoking volatility.
Dollar Bulldozes Its Way Through EM Currencies Aided by Yuan
“It is very hard to fight the dollar bull trend right now,” Chris Turner, head of currency strategy at ING Groep NV, wrote in a note. He said the index could climb another 1.2% toward 1,280, which would be its highest since October.
For most of this year, the market had been betting major central banks including the European Central Bank and Bank of England would loosen policy in unison with the Fed. That kept moves subdued across currency markets, with gauges of implied price swings falling to multi-year lows.
But with Fed policy on hold for longer, just as a fresh bout of risk aversion filters through markets, the dollar’s advance is being compounded. Top Israeli military officials reasserted that their country has no choice but to respond to Iran’s weekend drone and missile attack, raising the prospect of a wider war.
“The increase in geopolitical uncertainty has been the icing on the cake,” said Roberto Cobo Garcia, head of G-10 FX strategy at Banco Bilbao Vizcaya Argentaria SA in Madrid, referring to the dollar’s allure as a haven.
Across the Group-of-10 currencies, the dollar has advanced the most against the Swedish krona and Australian dollar over the past five days. In Asia, it was the South Korean won and Indonesian rupiah that were among the hardest hit.
Custodial data held by State Street shows that institutional flows into the greenback in the five days to April 11 hit their highest since November 2022. Asset managers have been selling the euro in particular, adding to their already underweight positions on growing conviction of upcoming rate cuts by the ECB. The Canadian dollar has also seen an exodus.
“Data surprises have reinforced that idea that interest rates will diverge after all, with rates falling across European economies in the summer but perhaps not in the US,” said Michael Metcalfe, head of macro strategy at State Street Global Markets.
