US dollar dominance crushes Asian currencies amid global recession concerns

A mix of higher interest rates and geopolitical uncertainty has boosted Bloomberg's dollar gauge by more than 6 per cent this year. PHOTO: REUTERS

SINGAPORE (BLOOMBERG) - The US dollar is powering ahead against almost all its major global peers, buoyed by higher Treasury yields and a selldown in stocks that is turbocharging demand for the world's reserve currency.

The Bloomberg Dollar Spot Index gained for the second day on Friday (May 6), approaching a two-year high set last month as investors seek shelter amid concern that interest rate hikes by the United States Federal Reserve will send the global economy into recession.

Asian currencies were the biggest losers on Friday, with the Taiwan dollar, South Korean won and the Chinese renminbi all dropping at least 0.5 per cent.

"After such a brutal selldown, you are probably not wanting to plonk your money down anywhere else other than dollars when all you are focused on is safety," said Mr Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. "The dollar is the only safe prize in town right now."

The Singapore dollar was trading at 1.3853 to the dollar at noon local time, dipping 0.05 per cent from Thursday's close, after a session low of 1.3902 earlier in the morning.

The Singdollar has weakened about 2.7 per cent against the US currency so far this year.

Singapore's central bank has tightened its monetary policy three times since October, allowing the local dollar to strengthen against the currencies of its trading partners to combat inflation.

A mix of higher interest rates and geopolitical uncertainty has boosted Bloomberg's dollar gauge by more than 6 per cent this year. Relentless dollar strength has hammered the yen in particular, with Japan's currency sliding almost 12 per cent since the end of December as the nation's dovish monetary policy diverges with the Fed's hawkish rhetoric.

Emerging market bonds are also being hammered after US 10-year yields climbed above 3 per cent this week. Sovereign debt slid on Friday as investors ditched growth-sensitive assets. 

Intervention risk

The dollar’s surge raises the spectre of greater intervention by the region’s central banks looking to stem the rout in their currencies. 

Some measures are already under way. Japanese officials have been vocalising their displeasure of the yen’s “disorderly” moves, while the People’s Bank of China has sought to curb the renminbi’s weakness by cutting the amount of money banks need to have in reserves for foreign currency holdings.

The Monetary Authority of Singapore signalled in April that even further tightening of its Singdollar policy is possible at its next review in October.

“Asian central banks are not out to draw a line in the sand in this kind of environment,” said Mr Sim Moh Siong, a currency strategist at Bank of Singapore. “There could be intervention to smooth excessive volatility.”

Hong Kong may be next. The city’s currency is a whisker away from the 7.85 per dollar level at which the central bank steps in to ensure the peg to the dollar remains in place. 

Strategists say buying the dollar against virtually everything else is likely to remain a winning strategy. 

"King dollar still has more to gain over the coming months," said Mr Rodrigo Catril, strategist at National Australia Bank in Sydney, who recommends a core long dollar position in portfolios. "The Fed remains resolute on its quest to quickly get to neutral if not going beyond."

• With additional information from The Straits Times

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