Analysis: ‘Perfect storm’ lifts dollar over unsettled markets

NEW YORK, Oct 1 (Reuters) – A grinding rally in the dollar is picking up speed, fueled by a hawkish tilt from the Federal Reserve, rising Treasury yields and concerns over the possibility of a drawn-out battle to raise the U.S. debt ceiling.

The greenback is up 4.7% year-to-date and stands near its highest level in a year against a basket of currencies. Net bets on the dollar in futures markets are at a more than 18-month high, according to data from the CFTC.

Because the dollar is the world’s dominant currency, its trajectory can have far-reaching implications for everyone from corporations to global central banks.

While a robust dollar can be a sign of economic strength, a too-rapid rally in the currency can also hit the balance sheets of U.S. exporters by making their products less competitive abroad and make it more expensive for multinationals to convert their funds back into their home currency.

“The U.S. dollar move we’re seeing at present is due to a confluence of factors that are all aligning to create the perfect storm,” said Simon Harvey, senior FX market analyst at Monex Europe in London.

One key driver of the dollar’s strength has been a more hawkish Fed, which last week said it would start unwinding its $120 billion in monthly government bond purchases as soon as November and potentially begin raising rates in 2022, earlier than some investors had expected. read more

Yields on 10-year United States Treasury Inflation Protected Securities , which strip out inflation, have risen by about 37 basis points since early August, compared with a gain of only 5 basis points for its German counterpart. That has increased the attractiveness of dollar-denominated Treasuries compared with their foreign counterparts.

“It seems the consensus view that (the) Fed taper was in the price of the dollar was incorrect,” said Richard Benson, co-chief investment officer, at Millennium Global in London. “We’ve had a 20-30 basis-point backup in yields which has supported the dollar.”

A nasty fight over raising the U.S. debt ceiling, which could result in a U.S. default if lawmakers do not agree by Oct. 18, is also pushing up the dollar, a popular destination for nervous investors. read more

So are worries over the meltdown of heavily indebted China Evergrande Group, once the country’s top-selling real estate developer, as well as concerns over rising inflation and potentially slower growth, said Harvey, of Monex Europe. read more

The S&P 500 (.SPX) fell 4.8% in September, its worst month since March last year, while the dollar index rose 1.7%.

“The bulk of these factors are all pointing to a more stagflationary macro environment and are thus leading to markets taking shelter in the dollar,” Harvey said.

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