The dollar strengthens on safe-haven demand as markets worry about China and banks

9 Aug 2023 , 10:12 AM

The dollar held onto its overnight gains against key peers in Asia on Wednesday as investors sought the shelter of the greenback in the face of dangers from a faltering Chinese economy and downgrades for U.S. banks.

The risk-averse Australian and New Zealand dollars slumped to levels not seen in several months. However, the Chinese yuan found some solace after the central bank established a firmer official rate than anticipated, indicating that it was troubled by recent falls.

Following a 0.47% increase in the previous session, the U.S. dollar index, which compares the dollar to the euro, yen, and four other currencies, was little changed at 102.50 in the morning Asian time.

After data on Tuesday revealed that Chinese imports and exports shrank more quickly than anticipated in July, concerns about the global economy erupted once more.

Consumer prices in China decreased in July for the first time in more than two years, according to data released on Wednesday, fueling fears of deflation even if the decline of 0.3% was slightly less than anticipated in a Reuters poll.

Concerns over US banks increased as a result of Moody’s downgrading the credit ratings of several small to mid-sized US banks and announcing that it may do the same with some of the biggest lenders in the country, including Bank of New York Mellon and US Bancorp. Furthermore, Rome stirred up trouble by imposing a one-time 40% tax on Italian bank profits.

Demand for U.S. Treasuries increased as a result of haven-seeking investors, and 10-year rates momentarily fell back below 4%.

After the People’s Bank of China announced the midpoint rate for onshore trading at 7.1588, far higher than the Reuters estimate of 7.2198, the dollar declined 0.12% to 7.2274 yuan in offshore trading.

After tumbling on Tuesday to its lowest level since June 1 at $0.6497, the Australian dollar, which frequently serves as a proxy for the prognosis for China’s economy, was roughly flat at $0.6543.

The kiwi, the currency of New Zealand, fell 0.16% to $0.6054, moving back near the two-month low set in the previous session of $0.6035.

Despite some additional dovish signals from Federal Reserve officials overnight, the U.S. currency remained strong. Philadelphia Fed President Patrick Harker expressed the opinion of Atlanta Fed President Raphael Bostic that interest rates are already high enough.

Although the message has not been consistent, Fed Governor Michelle Bowman stated on Monday that additional hikes are anticipated.

Money market traders continue to place odds of 86.5% on a quarter point rate increase at the upcoming policy meeting in September.

For feedback and suggestions, write to us at [e-mail]