The US dollar rises on higher US yields

The US dollar marched higher overnight, benefiting from a rise in US yields after a less-dovish Powell and a small amount of risk aversion buyers. The implications of a Fed taper have been making their way through currency markets for a while now, even as equity markets stayed in their own dreamland space. The dollar index climbed 0.35% overnight to 93.74, before easing slightly in Asia to 93.70 as US equity futures rally. The index is now locked and loaded for a further rally above 94.00.

EUR/USD was sidelined overnight, easing to 1.1685 this morning. 1.650 to 1.1750 continues to contain nicely. The British pound suffered, GBP/USD tumbling by 1.20% to 1.3540 as petroleum shortages persist and winter of discontent fears rise. GBP/USD crashed through major support at 1.3610 overnight and this sets up a much larger move lower targeting 1.3300 initially. The spike higher in US yields lifted USD/JPY 0.45% higher to 111.50 overnight. It will ignore the politics of a new Japanese PM today, and a daily close above 111.70 will signal the start of a directional move higher targeting 114.00. Much will depend on the direction of US yields, however.

AUD/USD and NZD/USD tumbled by around 0.70% overnight on rising fear gauges, with AUD/USD catching an energy price tailwind today, rising 0.20% to 0.7250. NZD/USD has continued falling by 0.15% to 0.6950 today after Covid-19 cases spiked in Auckland. If the delta variant jumps the fence around Auckland, NZD/USD has a lot more downside, having broken support at 0.6980 overnight.

Asian currencies retreated overnight, led by the won and the baht. If we are indeed on the cusp of a taper repricing in markets, the Thai baht, Korean won, Indonesian rupiah and Philippine peso will be the most vulnerable with monetary policies completely out of Fed-sync. High energy prices and a reopening economy appear to be sparing the Malaysian ringgit from the fallout for now. China’s PBOC continues to set neutral USD/CNY fixes signalling which will provide some stability to the Asian FX space.

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