Sat, Oct 16, 2021 @ 12:09 GMT
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The US Dollar Rallies Once Again

US yields boost the dollar

Once again, the US dollar rose overnight, powered by higher US yields. In contrast to the day before, the US dollar strength was more broad-based across the entire G-10 and EM space. The dollar index rose 0.22% to 92.94, although, as usual, it remains unchanged in wait-and-see Asian trading. The index has now recorded three successive closes above its 200-day moving average (DMA), which signals that dollar strength should continue, with the index initially targeting 93.20 and then 94.00.

USD/JPY has quietly moved higher over the last few sessions and is now at a near one-year high at 109.97 this morning. Inevitably, there will be options and Japanese exporter-related offers at 110.00, but once they are eroded, I would expect USD/JPY to move quickly higher to 110.50. Assuming no significant surprises in this week’s JGB auctions, USD/JPY is set to move higher to 112.00 in the sessions ahead.

EUR/USD has fallen to 1.1770 as of today, just above its series of recent multi-day lows at 1.1760. With Covid-19 lockdowns weighing on sentiment in Europe, a daily close below 1.1760 signals further losses to 1.1600. Likewise, GBP/USD attempted to recapture the base of its multi-month upward channel at 1.3825 but has failed, falling to 1.3775 this morning. A daily close below its recent low at 1.3670 signals further losses to the 1.3400 area.

The PBOC set the USD/CNY fix higher at 6.5641 today, in line with expectations and reflecting dollar strength elsewhere. It keeps liquidity via the repos neutral, though, lending some strength to the yuan in intraday trading. USD/CNY has moved through previous resistance at 6.5500 now and looks set to test 6.6000 in the days ahead as rising US yields continue the 2020 dollar short-squeeze across the globe.

Regional Asian currencies continue to fight a managed retreat, although USD/INR is threatening resistance at 73.00, and USD/MYR at 4.1500, with USD/IDR just below 14,500.00. Much will depend on the Biden package details tomorrow, and most importantly, how he intends to pay for it. A bond tantrum this week, along with strong US employment data on Friday, could set up a sustained round of regional currency weakness next week, testing Asia’s dirty peg system.

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