US dollar gains on flight to safety; pound, Swedish krona, kiwi struggle

THE US dollar rose to a fresh two-month high against a basket of peers on Wednesday (May 24) as uncertain US debt ceiling negotiations sent investors to safe havens, while eyes were also on Britain’s pound, Sweden’s krona and New Zealand’s dollar.

The US dollar index, which tracks the greenback against six major peers, rose to as much as 103.77, up 0.25 per cent on the day, its highest since Mar 20.

The impasse in Washington over debt ceiling negotiations has helped lift the US dollar, even though it could lead to a default and push the country into recession, as investors reckon this could spell worse trouble for the global economy.

Share markets around the world fell as well due to the uncertainty.

Also in focus was the pound, which dropped to a one-month low against the US dollar of US$1.23645 and was last just above that, down 0.23 per cent, after data showed British inflation slowed by much less than markets had been expecting.

The British currency lost ground against the euro too, which was last at 86.93 pence.

Higher inflation, leading to higher for longer Bank of England rates, has been supporting the pound in recent months, but that relationship is now starting to reverse.

“We’re now in that realm where if the Bank of England does meet market expectations and take interest rates that high, we’re talking about a worsening of the UK investment outlook, and financial stability considerations coming into view, which is negative for UK assets,” said Simon Harvey, head of FX analysis at Monex Europe.

Another currency under pressure was Sweden’s krona, which hit 11.511 krona per euro, its weakest against the common currency since March 2009.

“This is not only on the back of UK inflation data, but also eurozone (activity data) yesterday which hit the same note in terms of core services inflation, and that is leading to rate differentials in Europe widening against Sweden, where we think the Riksbank is likely to hike for the last time at its next meeting in June,” said Harvey.

Higher rates in Europe than in Sweden have been pressuring the crown this year.

Earlier in the day, the Reserve Bank of New Zealand (RBNZ) raised interest rates by 25 basis points, as expected, to the highest in more than 14 years at 5.5 per cent. But the RBNZ’s policy statement forecast that rate would prevail until June 2024 – unchanged from the earlier forecast.

“The RBNZ was surprisingly dovish in its messages and forecasts,” said Carol Kong, currency strategist at Commonwealth Bank of Australia. “In contrast to market expectations, the RBNZ kept its projected cash rate peak at 5.5 per cent and signalled its tightening cycle is over.”

The kiwi fell to a near three-week low and was last down 1.9 per cent at US$0.613. The Australian dollar eased 0.57 per cent to US$0.6573.

Elsewhere, the euro and yen were both steady against the US dollar at US$1.1076 and 138.48 yen per US dollar respectively.