(Bloomberg) — Traders have flocked to the dollar this week as they parsed implications of the U.S. debt-ceiling battle and a shift toward more hawkish policy from the Federal Reserve.
A gauge of the dollar’s strength against major peers rose to the highest in almost 11 months on Wednesday. The dollar outperformed all of its Group-of-10 peers, with the New Zealand dollar and Norwegian krone among the biggest losers. The euro declined to a 10-month low.
Stocks rose and Treasury yields fell on Wednesday following an equity-market rout a day earlier. Treasury yields still remain elevated, though, as yields on 10-year notes sit close to their highest levels since June.
Japan’s yen has been particularly hard hit from the dollar rally, reaching its lowest level against the greenback since February 2020. Month-end portfolio rebalancing could lead to further dollar buying, as traders look to sell their yen-denominated equities bets.
Putting a timeframe on the dollar’s outlook is difficult given how recent the repricing is, but a stronger dollar is more likely than not through year-end, according to Simon Harvey, senior FX market analyst at Monex Europe.
“We will see some idiosyncratic risk clearly, especially around currencies where the repricing has been aggressive due to bullish positioning prior,” he said in an email, noting the British pound and New Zealand dollar. “But generally we are shifting our views onto a more sustained bout of U.S. dollar strength, with the pro-cyclical rally to be delayed now until 2022.”