Dollar hovers near 1-year high as Fed tightening in focus, iron ore prices boost Aussie

LONDON (Reuters) – The dollar hovered near its highest levels in a year against a basket of peers on Thursday on rising expectations the Federal Reserve will taper stimulus from November, while a bounce in iron ore prices boosted the commodity-linked Australian dollar.

FILE PHOTO: U.S. dollar banknotes are seen in this photo illustration taken February 12, 2018. REUTERS/Jose Luis Gonzalez/Illustration/File Photo

The safe haven greenback has made sharp gains over the last two sessions on concern the Fed could withdraw economic support as global growth slows and high inflation is high. Spiking bond yields added to the currency’s strength.

Its rise is despite an impasse in Washington over the U.S. debt ceiling that threatens to plunge the government into a shutdown.

The dollar index – which measures the currency against a basket of six rivals – stood at 94.294, little changed from Wednesday, when it hit 94.435 for the first time since late September last year.

Yields on the benchmark 10-year Treasury note stood at 1.5289%, holding near a mid-June high reached Tuesday at 1.5670%.

“The move (in the dollar index) was widespread and on the day not accompanied by any particularly large rises in US yields nor large equity corrections lower,” ING said in a note to clients. “It feels like the move might have been driven by quarter-end corporate and institutional flows.”

The dollar bought 111.91 yen, little changed from Wednesday, when it reached 112.05 for the first time since February 2020. It was on track for its worst monthly performance since March.

The euro was mostly flat at $1.16045, holding near Wednesday’s 14-month low of $1.15895.

Speaking at a European Central Bank forum on Wednesday, Fed Chair Jerome Powell, ECB President Christine Lagarde and Bank of England Governor Andrew Bailey said they were monitoring inflation after a surge in energy prices and production bottlenecks.

The spread on the 3-month euro-dollar cross currency basis swap tightened slightly to -21.25 basis points, after hitting their widest since December 2020 on Wednesday.

“The sudden sharp dollar bid in the 3 month EURUSD cross-currency market indicates that foreign banks (not foreign banks in the US) operating in the dollar market with domestic funds are caught short of dollars and scrambling for funding on quarter end,” said Sebastien Galy, senior macro strategist at Nordea Asset Management.

“That is a sure sign of excessive leverage in foreign financials in the USD market (local affiliates are regulated independently by the US).”

The risk-sensitive Australian dollar firmed 0.5% to $0.7206, after plummeting 0.9% overnight, as iron ore prices rallied ahead of the Golden Week holiday in Australia’s top trading destination China.

A rebound in monthly Chinese services data also “looks to have gone some way to allaying fears that the evident slowdown in China growth of late is accelerating to the downside,” buoying the Aussie, said Ray Attrill, NAB’s head of FX strategy.

Sterling edged up 0.1% to $1.34357 but remained near the nine-month low of $1.3412 reached overnight on concerns about soaring natural gas prices and almost a week of petrol shortages in Britain.

A slight improvement in overall risk sentiment after days of gloom was seen in the cryptocurrency markets, as bitcoin rose 5% to $43,567 and ether bounced 6.4% to $3,034.09.

Both coins are down between 20%-27% from their September peaks.

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