The safe-haven U.S. dollar hit a one-week high on Tuesday after weak global economic data, particularly in China, reignited global recession fears and weighed on risk-friendly currencies like the Australian dollar.
The dollar index, which measures the greenback against six major peers, hit a peak of 106.81 in early European trading, regaining all its losses from last week when lower-than-expected U.S. inflation data sent investors out of the dollar and back towards risk-friendly assets.
Yesterday, the latest Chinese Industrial Production readings recorded a 3.8% growth — falling short of the 4.6% forecast, and raised concerns of a possible recession. On the same day, the Chinese central bank lowered its interest rate from 3.70% to 2.75%, in order to stimulate the economy while dealing with the pandemic.
As such, a weakened global demand saw WTI oil futures fall to $89.41 a barrel. Meanwhile, safe-haven demand is increased with growing recession signs, the US dollar gained much momentum, USD/CAD rose and stabilized at 1.2904, gaining over 100 pips.
The Reserve Bank of Australia has released its meeting minutes this morning, expecting to raise rates even further to “normalize monetary conditions over the months ahead”. The Aussie almost dropped a full 1% against the greenback, declining and slowing at 0.7020, to a closing price of 0.7022.
Euro and Pound both suffered noticeable losses, EUR/USD slid to 1.016, and the GBP/USD pair closed at 1.2054. Gold futures went below the $1,800 level to $1,798.1 an ounce.
“The U.S. growth picture is still intact, but the overall global picture remains fragile, given concerns about China, and that has put a dampener on risk sentiment and hurt the Aussie and some emerging market risk currencies,” said Sim Moh Siong, currency strategist at Bank of Singapore.
China’s central bank on Monday unexpectedly cut a key interest rate to try to revive credit demand to support the COVID-hit economy after a string of weak economic data releases for July.
The Australian dollar fell 0.44% to $0.699 on Tuesday, dipping back below the symbolic $0.7 level. Australia’s close trade ties with China means its currency is sometimes treated by traders as a liquid proxy for China’s yuan.
The U.S. dollar climbed as high as 6.84146 on the yuan traded offshore, a level last seen in mid-May.
The move back to the safety of the dollar also hurt the euro, which fell 0.18% to $1.0142, and sterling, which was last trading at $1.2026, down 0.23% on the day,
The dollar also firmed 0.3% against fellow safe-haven the Japanese yen to 113.7 yen.
The dollar index fell as low as 104.63 last week for the first time since the end of June after sliding from a two-decade high at 109.29 in mid-July, as markets pared bets for continued aggressive Fed tightening amid signs of a cooling in the economy and inflation.
However, in recent days, several Fed policymakers have spoken of the need for continued rate hikes.
“Fed officials have no choice but to sound tough in the face of a very, very tight labour market and far too high inflation,” Kit Juckes, the head of FX strategy at Societe Generale, wrote in a research note.
“It’s hard to build a compelling case to sell the dollar in that world.”
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