The US dollar on Friday extended its advance against a basket of currencies, building on gains logged after the US Federal Reserve earlier this week surprised markets by signaling it would raise interest rates and end emergency bond-buying sooner than expected.
The US dollar index, which tracks the greenback against six major currencies, closed up 0.47 percent at 92.32, its highest since mid-April. The index rose 1.95 percent from a week earlier.
The jolt to foreign exchanges was on Wednesday triggered by Fed forecasts showing 13 of the 18-person policy board saw rates rising in 2023, versus only six previously, with the median board member tipping two hikes in 2023.
Investors’ risk appetite took another hit after St Louis Fed President James Bullard on Friday said that the US central bank’s shift this week toward a faster tightening of monetary policy was a “natural” response to economic growth and particularly inflation moving quicker than expected as the country reopens from the COVID-19 pandemic.
“I think this is a direct echo of the 2013 taper tantrum. You are seeing a perceived shift in the Fed’s reaction function driving investors into the safety of the US dollar,” said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.
With investors pricing in a sooner-than-expected tapering of extraordinary US monetary stimulus, the euro and the yen have come under selling pressure over the past few trading sessions.
“Essentially, the entire world was short the dollar going into this, everyone from speculative traders to corporates to investors,” Schamotta said.
“You are seeing a wholesale unwind here,” he said.
The unwind of sizeable bearish bets against the US dollar is expected to provide support for the greenback in coming days, investors said.
Goldman Sachs Asset Management head of currency Arnab Nilim, who had been short the US currency headed into this month’s Fed meeting, said he has reduced the position and expects the US dollar to perform well, especially against the low-yielding currencies.
With a dovish European Central Bank seemingly far behind the Fed in the monetary policy cycle, traders will be reluctant to buy euros against US dollars.
“The US central bank is one step ahead and as a result USD is likely to remain well supported against the EUR,” Commerzbank strategists wrote in their daily note.
With equity markets hurting, the Australian dollar — seen as a proxy for risk appetite — was down 0.68 percent at US$0.74995, its lowest since December last year.
In Taipei on Friday, the New Taiwan dollar declined against the US dollar, losing NT$0.045 to close at NT$27.810, down 0.65 percent for the week.
Sterling extended its fall against the US dollar, dropping below US$1.39, hurt by the Fed’s hawkish surprise and an unexpected fall in Britain’s retail sales.
Additional reporting by CNA, with staff writer
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