US dollar heads for another strong week, yuan weakens past key level

THE US dollar rallied again on Friday (Sep 16), as US Treasury yields rose ahead of a potentially huge Federal Reserve (Fed) interest rate hike next week, while China’s yuan weakened past the psychologically important threshold of 7 per US dollar.

The US dollar, measured against a basket of currencies, is headed for a near 1 per cent rise this week, as investors flocked to the safety of the greenback. The yuan is the latest currency to hit a multi-year low as the US dollar rises relentlessly.

The euro fell as much as 0.5 per cent at US$0.9945, while sterling fell to a new 37-year low of US$1.1351, 1 per cent lower on the session. Both recovered but were still lower by 1050 GMT.

The US dollar index rose 0.5 per cent to 110.26, not far from its 2-decade high of 110.79 reached earlier this month.

“With the Fed set to hike by possibly another 175 bps before year-end, we would expect financial conditions to remain unfavourable for assets generally and it clearly points to the US dollar being the primary beneficiary,” said Derek Halpenny, head of research, global markets, MUFG.

The towering US dollar pushed the offshore yuan past the critical threshold of 7 per US dollar for the first time in more than 2 years overnight, with the yuan hitting a trough of 7.0424.

The onshore unit similarly broke the key level soon after markets opened on Friday.

Data showed China’s economy was surprisingly resilient in August, with factory output and retail sales both growing more than expected. But a deepening property slump weighed on the outlook.

“Growth, policy divergence between the US and China could continue to support the USDCNH in the next few months, even if some pullback is seen intermittently,” said analysts at Maybank, who noted some “upside surprises” in the Chinese data release.

Traders will now shift their focus to a slew of monetary policy meetings by the Federal Reserve, the Bank of Japan (BOJ), and the Bank of England next week, with the Fed in centre stage.

US Treasury yields rose after data released overnight showed US retail sales unexpectedly rebounded in August, while a separate report from the Labor Department showed initial claims for state unemployment benefits fell 5,000.

Fed funds futures point to a 75 per cent chance of a 75-basis-point rate hike at next week’s meeting and a 25 per cent chance of a 100-bps increase.

This could spell further pain for the battered Japanese yen, which has been a victim of the surging greenback and growing interest rate differentials.

But 3 sources familiar with the thinking of the BOJ said the central bank has no intention of raising interest rates or tweaking its dovish policy guidance to prop up the yen.

The US dollar was 0.2 per cent lower against the yen at 143.16 , but remained on track for a fifth straight weekly gain. REUTERS