US dollar strength returns

US dollar rises as risk appetite sours

The US dollar rose overnight, responding to deteriorating risk sentiment from omicron, China, Ukraine, or Iran or whichever other headline you wish to pick. The fact that the US dollar correction does not look like continuing into the US inflation data tonight requires some backpedalling from yesterday on my part as well. It appears that currency markets are as vulnerable to headline tennis as other asset classes. It also suggests that markets are less complacent about the US inflation and FOMC stress points than I thought as well. A high inflation print tonight likely leads to more US dollar strength.

The dollar index rose 0.26% to 96.20 overnight where it remains in Asia. It seems unlikely that support at 95.50 will be retested before the FOMC and the odds are rising that a retest of 97.00 will occur next week. Notably, EUR/USD enjoyed only one day in the sun, and gave back all of its gains overnight, falling to 1.1300 today. That is as good a signal as any that US dollar strength is the path of least resistance, even as GBP/USD and USD/JPY held steady.

Muddying the waters overnight was a weaker CNY fixing by the PBOC yesterday, followed by an even weaker CNY fixing today at 3.3702, some 250 points above market expectations. China also raised the amount of foreign currency Chinese banks are required to hold in reserves. The none too subtle signal from the PBOC about yuan strength sent USD/Asia sharply higher overnight, led by USD/CNH, which rose 0.55% to 6.780.

After the USD/CNY fixing surprise, USD/CNH and USD/CNY has actually fallen 0.20% this morning, leading to some temporary strength in the rest of the Asia bloc. However, and I’m surprised markets tactically ignore this; disregarding guidance from any Chinese authority, let alone the PBOC, is a dangerous business. Given that US dollar strength is coming from both developments in the US itself, fading risk sentiment, and now from the PBOC, any rally in Asian currencies is probably one to sell into.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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