The dollar retreated on Tuesday to a three-week low, hit by a proliferation in rate-hike bets in other markets, while the yuan surged to its highest in four months, benefiting from greenback weakness and a slight easing in property market concerns.
A robust start to the U.S. earnings season and hopes that China will be able to contain its property market malaise boosted global stock markets, lifting currencies such as the Australian and New Zealand dollars and the Norwegian crown that benefit when risk sentiment and commodity prices are high.
The dollar index , which measures the greenback against six peers, sank as low as 93.501 for the first time since Sept. 28, before inching up to 93.565, 0.35% down on the day.
A week ago, the dollar index reached a one-year high of 94.563, benefiting from stagflation fears as well as bets the Federal Reserve would begin tapering its monetary stimulus next month, followed by interest rate increases next year.
But with Fed tightening priced in, money markets are raising wagers for policy normalization elsewhere, especially in Britain where a cumulative 35 basis points in rate hikes are priced in by the end of the year.
New Zealand’s data on Monday showed the fastest consumer-price inflation in more than a decade.
Britain and New Zealand have consequently led a rise in short-term bond yields, with short-dated yields climbing comparatively more than in the United States.
“We had a big short position build-up in euro, Aussie dollar, Canadian dollars but after real U.S. yields fell back last week, it took some heat out of the dollar rally which means we are seeing some short-covering now,” said Kenneth Broux, FX strategist at Societe Generale.
“Dollar gains have been led by repositioning for the Fed Funds rate and now we have a repricing in many other place,” Broux added.
The New Zealand dollar rose as high as $0.715 for the first time since Sept. 14,
The Aussie touched a six-week high of $0.7474, shrugging off a dovish set of minutes from the Reserve Bank of Australia’s last meeting.
The yuan was a standout gainer, as fears about contagion from property giant China Evergrande’s debt troubles receded and some of its peers made bond coupon payments. Policymakers said late last week the situation was controllable.
That, combined with the dollar pullback, took onshore yuan as high as 6.3883 per dollar, the strongest since June 16. In offshore trading it reached 6.3785, also the highest since June 16 and set for the biggest daily gain since July.
Stephen Gallo at BMO Capital Markets said the moves also resulted from Chinese 10-year yields rising above 3% for the first time since July, a move which happened on Monday, as long-dated yields rose globally .
“The decline in Chinese government debt prices may have caught FX investors by surprise, given the weak tone of China’s Q3 economic data release,” Gallo said.,
The euro , where positioning earlier this month turned net short for the first time since March, also advanced, rising 0.4% to $1.167, a level not seen since Sept. 29.
Broux said, however, that the European Central Bank (ECB) was “the missing piece” which could pressure the euro against peers.
“The assumption is they are at the end of the (policy tightening) timeline along with the Swiss and Bank of Japan,” he added.
In cryptocurrencies, bitcoin rose as high as $62,991.93 for the first time since mid-April, closing in on the all-time high of $64,895.22.