US dollar remains firm

US dollar steady despite fall in yields

Despite another fall by US long-dated bond yields and a retreat by tech stocks, the US dollar continues to surprise and hold onto much of its recent gains of the past week. The dollar index rose 0.21% to 92.56 overnight, edging higher to 92.89 in Asia. The dollar index remains near to resistance at 92.85, and a weekly close above there this evening signals more gains to 93.50 next week. Support remains at 92.00.

The US dollar strength may not be a dollar story, although currency markets have for some time priced in a more cautionary tale regarding inflation than bond or equity markets. The greenback appears to be supported by the potential weakness elsewhere. Notably, a potentially dovish ECB next week setting up a possible monetary policy divergence in the quarters ahead. The potential headwinds of Covid-19 in Asia and further US restrictions on China are also playing into the US dollar’s hands, with ASEAN currencies still very much on the weak side.

EUR/USD faded overnight ahead of resistance at 1.1850, falling to 1.1800 as of this morning and a daily close under 1.1770 hints of a deeper retracement below 1.1700 next week. GBP/USD remains locked mid-range between 1.3800 and 1.3900, supported by the removal of pandemic restrictions and yet another Bank of England official making tightening noises overnight. A break of either level will signal its next directional move.

NZD/USD rose 0.50% t0 0.7020 today after blockbuster inflation data had the market scrambling to price in RBNZ rate hikes tout suite. Its rally has been tempered by the viral woes of its trans-Tasman neighbour Australia, but the kiwi should outperform against both the Australian and US dollars into next week.

China set a slightly weaker yuan fixing this morning at 6.4705 but left liquidity neutral at the repo. The spot market is slightly lower at 6.4670, but with the PBOC setting slightly weaker fixes this week, support at 6.4500 is unlikely to be tested. ASEAN currencies will remain under pressure into the end of the week and will underperform until the Covid-19 situation improves materially.

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