US dollar gains as China sticks to stringent Covid-19 policy; Aussie, NZ dollars among biggest losers

The dollar gained 0.9 per cent on the Chinese offshore renminbi to 7.237 in early Asia trade. PHOTO: REUTERS

SINGAPORE - The US dollar climbed on Monday as sentiment soured after China said it is sticking with its strict Covid-19 restrictions, quashing hopes of an imminent reopening in the world’s second-largest economy, which had earlier fired a broad rally in riskier assets.

China said at the weekend that it will persevere with its “dynamic-clearing” approach to Covid-19 cases as soon as they emerge, giving little indication it would ease its outlier zero-Covid strategy nearly three years into the pandemic.

The US dollar gained 0.9 per cent on the Chinese offshore yuan to 7.237 in early Asia trade, while the risk-sensitive Australian and New Zealand dollars were also among the biggest losers, both falling nearly 1 per cent. The Australian dollar was down 0.66 per cent at US$0.6427, while the New Zealand dollar fell 0.7 per cent to US$0.5887.

The two currencies were huge beneficiaries of a broad rally on Friday – rising nearly 3 per cent – as speculation that China could soon end its Covid-19 restrictions gathered pace and buoyed risk appetite.

Against the Singapore dollar, the US dollar rose to $1.404 as at 5.40pm on Monday.

Elsewhere, sterling edged 0.42 per cent lower to US$1.1324, while the euro slipped 0.3 per cent to US$0.9930, reversing their roughly 2 per cent jump on Friday.

“Any rally in the Aussie, as well as the other currencies, will likely prove short-lived, given China is still very committed to its approach to the Covid-19 outbreaks,” said Commonwealth Bank of Australia currency strategist Carol Kong.

Against the Japanese yen, the US dollar was up 0.26 per cent at 147.05.

This comes as China ended its string of stronger-than-expected fixings that had been in place since August. The People’s Bank of China set the fix at 7.2292 per US dollar, compared with the average estimate of 7.2287 in a Bloomberg survey of analysts and traders. Before Monday, the reference rate had been stronger than the forecasts for 47 straight sessions.

The latest fixing came after the yuan surged in both onshore and overseas trading in the previous session amid speculation Beijing may relax its zero-Covid policy. But in the longer term, the currency is still pressured by a slowing economy and a widening policy gap with the US after Federal Reserve rate hikes. 

The fixing “may reflect a moderation of strong measures to slow depreciation, as short positions could have reduced following last week’s expectation on easing of Covid-19 rules”, said Ms Becky Liu, head of China macro strategy at Standard Chartered Bank.

Investors were also assessing Friday’s United States jobs report, which showed that companies added a more-than-expected 261,000 jobs in October and hourly wages continued to rise, evidence of a still tight labour market.

But hints of some easing of market conditions, with the unemployment rate rising to 3.7 per cent, added to the case that the Fed could slow its pace of future rate increases and capped the US dollar’s gains.

Against a basket of currencies, the US dollar index firmed at 111.09.

“It was, overall, a pretty mixed report,” said Ms Kong. “Judging by market reaction, investors really focused on the lift in the unemployment rate, and that might have led to market participants scaling back their expectations on the Fed funds rate.”

Four Fed policymakers on Friday also indicated they would still consider a smaller interest rate hike at their next policy meeting.

Fed funds futures now show that markets are pricing in a 69 per cent chance of a 50 basis point rate hike at the Fed’s December meeting, with the next key data point being Thursday’s US inflation figures. REUTERS, BLOOMBERG

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