Dollar dips as inflation fears abate
Benign US data eased inflation nerves overnight, lifting risk sentiment and pushing US yields lower. That was enough to spur a sell-off in the US dollar as investors moved positioning once again, out of haven greenbacks. The dollar index fell by 0.47% to 89.75, where it remains in Asia. Despite the volatility of the week, the dollar index has traded in a choppy 89.70 to 90.20 range, with plenty of whip-sawing for anyone looking for it. A close below 89.70 for the week will signal the US dollar sell-off will resume next week.
The EUR/USD and GBP/USD have recouped almost all of their intra-week losses, rising to 1.2230 and 1.4180, respectively, today. If all goes to plan, EUR/USD should overcome resistance at 1.2250, targeting 1.2350 initially. GBP/USD has resistance at 1.4225, opening the road to a more substantial rally to 1.4400. Only a fall through 1.2150 or 1.4000 materially changes the bullish picture.
The Australian and New Zealand dollars have climbed to 0.7760 and 0.7190 today, but as barometers for global risk sentiment, neither are quite out of the woods yet. AUD/USD needs to hold support at 0.7680, rising through 0.7820 to ease reversal fears. NZD/USD needs to keep support around 0.7150 and remain the more vulnerable of the pair post-budget.
Asian currencies have had a mixed performance, with the Singapore dollar, Indonesian rupiah and Malaysian ringgit losing ground on Covid-19 nerves and falling oil prices. Elsewhere, the Thai baht, Indian rupiah and South Korean won all rallied, likely on a lower dollar index and falling oil prices. The Chinese yuan remained steady, with USD/CNY continuing to range between 6.4000 and 6.4500.
The mixed picture in Asia reflects local drivers of sentiment, exposure to commodity prices and a correlation to US strength or weakness. While the euro and pound have a vaccination premium baked into them, the picture on that front is much more mixed in Asia. An easing of US inflation fears should be a medium-term positive for regional currencies, most of which have some sort of dirty peg to the greenback. But I expect local issues to give a mixed picture in the short term.