US dollar rally picks up speed with no end in sight

The US dollar's resurgence has manifested in dramatic drops across every major currency. PHOTO: REUTERS

SINGAPORE (BLOOMBERG) - When Mr Nick Twidale reaches his desk in Bridge Street each morning, in the heart of Sydney's financial district, he is greeted by a seemingly endless slew of US dollar buy orders.

"It is the easiest trade in forex," said Mr Twidale, a 25-year markets veteran and Asia-Pacific chief executive at broker FP Markets. "Until there is a dramatic shift in fundamentals and rhetoric with the Fed, you would definitely be foolish to sell the dollar when the whole world is so nervous."

The US dollar's resurgence has manifested in dramatic drops across every major currency this past week as concerns about a hawkish United States Federal Reserve and the potential for a global recession drove demand for the ultimate haven. The euro sank below parity, the South Korean authorities verbally intervened to stop the won from extending a 13-year low, and hopes of a yen recovery were dashed as it tumbled back towards the key 140 per dollar level.

The rally looks to have plenty more room, with risks of hawkish comments from Fed chair Jerome Powell at the Jackson Hole symposium on Friday (Aug 26) expected to turbocharge a rush for the US currency.

"The dollar smile seems intact," wrote Mr Win Thin, global head of currency strategy at Brown Brothers Harriman, referring to the theory that the greenback strengthens during periods of both US economic outperformance or recession.

"(If) risk-off impulses ebb, the dollar should continue to benefit from the relatively strong US economic outlook and heightened Fed tightening expectations," he added.

Hedge funds have already increased their net short bets on the euro to a three-week high, while bearish wagers on the pound climbed to the highest since March 2020, according to the latest Commodity Futures Trading Commission data. Asset managers ratcheted up their yen shorts at the same time.

The euro's most bearish forecaster, JPMorgan Chase, sees the common currency falling to 95 US cents by December, data compiled by Bloomberg showed. RBC Capital Markets sees the pound sliding more than 5 per cent over the same period to the US$1.11 level, while Commonwealth Bank of Australia expects the Aussie to drop to 65 US cents.

Emerging blow

The dollar's meteoric rise is even more damaging for emerging markets, whose central banks are collectively burning through the equivalent of more than US$2 billion (S$2.8 billion) of foreign reserves every weekday to bolster their currencies.

India, Thailand and South Korea have seen their reserves plummet by a combined US$115 billion this year alone. China's renminbi, seen by many as an anchor to sentiment and currencies in emerging markets, is sliding towards the key seven per dollar level as Covid-19 restrictions and a slowing economy bite.

As the US yield curve inverts further - a closely watched sign of a pending recession - emerging currencies including the won, Hungarian forint, Brazilian real and Mexican peso are among the most vulnerable to plumb new lows, according to TD Securities.

"The combination of higher rates and higher US dollar has been exerting significant pressure on risk sentiment," said Mr Alvin Tan, strategist at RBC Capital Markets in Singapore. The dollar's strength "can continue to run through the rest of the year and probably into early next year".

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