US dollar shine fades as risk appetite rebounds for now

THE US dollar eased from recent 10-week peaks on Tuesday (Aug 22), as global risk appetite recovered after being hurt by a jump in US government bond yields and a weakening Chinese economy.

Rising US Treasury yields – with benchmark 10-year yields hitting 16-year highs on Tuesday – and unease over China have boosted the US dollar this month.

“What we’re seeing is a bit of a pause,” said Fiona Cincotta, senior markets analyst at City Index. “We’ve had a strong rally in the US dollar and there’s a cautiously optimistic mood today.”

The US dollar index – which measures the currency against six major counterparts, was a touch softer at 103.30, holding below Friday’s 10-week highs at 103.68. Still, it is up roughly 1.4 per cent so far in August.

The greenback slipped as much as 0.5 per cent against the yen in London trade; it was last down 0.3 per cent on the day at 145.76 yen, and down from recent nine-month peaks after Bank of Japan governor Kazuo Ueda met with the prime minister, although he said exchange-rate volatility was not discussed.

Overall moves in the US dollar were expected to be limited ahead of a speech by Federal Reserve chair Jerome Powell at the Fed’s central-bank symposium at Jackson Hole, Wyoming. “So much depends on what Powell says about whether rates will remain higher for longer,” said Cincotta, referring to the US dollar outlook.

The greenback trimmed early falls against European currencies, in a sign of underlying strength in the US currency. The euro was 0.1 per cent weaker at US$1.0885. Sterling was a touch firmer at US$1.2760, but off session highs at around US$1.28.

China’s battered yuan briefly popped to a one-week high before weakening again as worries about the economy continue to weigh on the currency. The Chinese central bank set the yuan midpoint at 7.1992 per US dollar on Tuesday, 1105 pips firmer than Reuters’ estimate. This comes as it attempts to keep a floor under the currency, following its slide to a 9.5-month low of 7.349 in offshore trading last week.

Tuesday’s fixing follows shallower and narrower interest-rate cuts than markets had expected a day earlier, as stimulus measures continued to underwhelm in the face of property sector turmoil and weakening economic growth.

The offshore yuan was last down roughly 0.25 per cent at around 7.3081 per US dollar.

“While the measures are helping to slow the pace of (Chinese) renminbi weakness in the near term, they are unlikely to reverse the weakening trend on a sustained basis until there is a significant improvement of investor confidence in China’s economic outlook,” said MUFG senior currency analyst Lee Hardman.

The Australian dollar was 0.4 per cent firmer at US$0.6441 as global risk appetite recovered. It had dropped to a 9.5-month low of US$0.6365 on Thursday.