The U.S. dollar gained broadly on Monday, rebounding towards a one-year high hit last week as slowing economic growth in China and firmer U.S. Treasury yields boosted the appeal of the greenback with the Japanese yen among the major losers.
Three data points over the weekend, namely strong inflation data in New Zealand, hawkish comments from the Bank of England and slowing growth in China has reaffirmed the broad theme of rising inflation and slowing growth in global markets.
Investors have chosen to trade that theme by buying the greenback against its rivals while simultaneously dumping currencies of commodity importers like Japan.
Latest weekly positioning data in currency markets showed hedge funds have ramped up their net bearish bets on the Japanese yen to their biggest levels since May 2019 while increasing their bullish bets on the greenback.
"Higher Treasury yields combined with China’s weak GDP numbers are spurring demand for the U.S. dollar and other safe haven currencies on Monday," said Raffi Boyadjian, an investment strategist at brokerage XM.
U.S. Treasury yields firmed on Monday, extending a trend in recent weeks with five-year bond yields rising to their highest levels since February 2020 as investors ramped up bets that the U.S. Federal Reserve was preparing to raise interest rates as early as next year.
The inflation outlook has also prompted expectations of earlier tightening of global monetary policy, with Danske Bank expecting as much as two rate hikes from the Fed in the second half of next year.
"For some time our central argument has rested on two factors coming together to support the dollar, namely the moderation in global growth and the Fed taking a gradual path towards eventual rate hikes," HSBC analysts said in a note. "This occurred sooner than we expected."
The dollar index rose 0.1% to 94.05, edging it back toward last week's one-year high of 94.563 which was the highest level since September 2020.
The yen was close to a new three-year low, with the dollar last up 0.1% at 114.36 yen, close to Friday's 114.47 level that was last hit in October 2018.
In New Zealand, where consumer prices zoomed higher at their fastest clip since 2010, analysts said the central bank would need to stay the course on its hiking trajectory even as the lockdown of Auckland was extended.
The kiwi jumped almost 0.5% to a one-month high of $0.7105 before easing back to trade down 0.2% at $0.7056 after a decade-high quarterly inflation reading.
Sterling slipped 0.1% to $1.3735 despite hawkish weekend remarks from Bank of England Governor Andrew Bailey who said policymakers "will have to act" as energy prices drive consumer prices higher.
In other data highlights, China's economic growth hit its slowest pace in a year in the third quarter, with power shortages crimping factory output - while in commodities, crude prices rose more than 1% to test 2018 highs.
The yuan eased slightly after the data. But taken together, China's slowdown, power crunch and worldwide signs that pressure from energy costs is hurting, seemed to turn investors broadly cautious as they brace for a bumpy period.
In cryptocurrencies, bitcoin, riding high on hopes for U.S. approval of a futures-based exchange traded fund that would funnel cash into the sector, hovered just shy of its record peak of $64,895. It last bought $60,956.