FOREX-Dollar set for best week since June on expected Fed tightening
* Euro steady below $1.16; dollar/yen above 111.00
* Sterling licking wounds, heads for worst week in a month
* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E
By Ritvik Carvalho
LONDON, Oct 1 (Reuters) – The dollar began the last quarter of 2021 near its highest levels of the year, and was headed for its best week since June as investors expected a hawkish-sounding Federal Reserve to lift U.S. interest rates sooner than its major peers.
Cautious market sentiment due to COVID-19 concerns, wobbles in China’s growth and a Washington gridlock ahead of a looming deadline to lift the U.S. government’s borrowing limit also lent support to the dollar which is seen as a safe-haven asset.
Refinitiv’s measure of the dollar index dipped to 94.166, having gained 1.1% so far this week, the largest weekly rise since late June.
“Last week’s Fed meeting added fresh life into the debate about a potential hike in the fed funds rate in 2022,” said Jane Foley, head of FX strategy at Rabobank.
“This is positive for the USD on two fronts. Firstly the USD looks better on a straightforward interest rate differential perspective. Secondly a hike in U.S. rates and a stronger USD will weigh on the growth outlook in EM.”
The growth outlook for emerging markets is already suffering on concerns of a slowdown in China and on fears of an energy crunch, Foley said.
“The result is that the USD benefits from a drop in risk appetite and flows out of higher risk EM markets.”
The euro was 0.1% higher on Friday at $1.1588, but has fallen about 1.3% during the week, and through major support around $1.16, to touch its lowest levels since July 2020.
The yen bounced from a 19-month low overnight but has lost 0.6% for the week and twice as much in a fortnight as a rise in U.S. Treasury yields has drawn flows from Japan into dollars. It last traded at 111.21 per dollar.
Benchmark 10-year Treasury yields are up for a sixth straight week and real 10-year yields, discounted for inflation, are rising far more quickly than counterparts in Europe.
Commodity currencies made a bounce on the dollar on Thursday following a Bloomberg report that China had ordered energy companies to secure supplies for the winter at all costs, but were back under pressure on Friday. The offshore yuan hit a two-week high of 6.4420.
Beijing is scrambling to deliver more coal to utilities to restore supply amid a power crunch that has unsettled markets due to the likely hit to economic growth.
“The reasons to suspect an energy supply crunch in China are more deeply rooted and largely boil down to China’s new policy aimed at reducing greenhouse emissions, which have put increasing curbs on domestic coal output,” said Francesco Pesole, G10 FX strategist at ING.
“At the same time, a historic import route – the one with Australia – has recently come under pressure amid geopolitical and trade tensions between the two countries, which recently saw China impose duties on Australian coal.”
One way this is affecting the…
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