The US Dollar (USD) was set for a fifth winning week versus major peers, making it longest winning streak for 15 months, buoyed by expectations US interest rates will stay high for longer, and by a shift to safer assets due to worries over China’s economy.
On Friday, however, the dollar trimmed those gains slightly as its rally against the yen kept traders on edge against the risk of intervention by Japan’s authorities.
A quickening in the depreciation for China’s yuan also appeared to be a concern for authorities in Beijing, as the People’s Bank of China set a much-stronger-than-expected daily fixing, giving the currency some early support after it struck 9-month lows a day earlier.
The US dollar index – which measures the currency against six developed-market rivals, including the yen and euro – eased 0.02% to 103.38 in the Asian day, after touching a two-month high at 103.59 overnight.
For the week, it is set to gain 0.5%.
On Thursday, minutes from the Federal Reserve’s last meeting showed most members of the rate-setting committee continued to see “significant upside risks to inflation,” suggesting a bias toward further rate increases.
Strong economic data this week, particularly retail sales, had already bolstered the case for additional tightening.
That all helped push 10-year Treasury yields to the highest since October at 4.328% on Thursday.
“The market wants the Fed to go on hold, but the data just isn’t supporting that,” said Tony Sycamore, a markets analyst at IG.
“The risk aversion, the higher yields, the resilient economic data … all of those things have played out to perfection for the U.S. dollar.”
Some selling to lock in profit from the dollar’s rally makes sense going into the weekend, Sycamore added, but a break above 103.70 for the index next week looks likely, opening the way for tests of the May peak at 104.70, and then 105.88.
Against the yen, the dollar eased 0.32% to 145.365 on Friday, after reaching a nine-month peak of 146.40 overnight.
In autumn of last year, the dollar’s surge beyond 145 triggered the first yen buying intervention from Japanese authorities in a generation.
However, at that time a steep drop in Treasury yields had also helped make that intervention a success, which is not the case currently, Ray Attrill, head of foreign-exchange strategy at National Australia Bank, wrote in a note to clients.
“No such JPY tailwind this time around,” he said.
Elsewhere, the euro edged up 0.06% to $1.0878, rebounding from Thursday’s six-week low of $1.08565.
Against the yuan, the dollar was about flat at 7.3045 in offshore trading , recovering a 0.24% loss from earlier, when the central bank set the official mid-point at 7.2006, more than 1,000 pips stronger than Reuters estimate.
The Chinese currency plumbed a nine-month trough of 7.3490 on Thursday in offshore markets.
China’s economic troubles have deepened, with property developer China Evergrande seeking Chapter 15 protection in a U.S. bankruptcy court, and concerns also growing over default risks in its shadow banking sector.
Beijing has so far disappointed with stimulus, even as each recent data release has painted an increasingly grim picture of the economic outlook, though the PBOC cut rates earlier this week in a surprise move that widened the yield gap against the U.S., rendering the yuan even more vulnerable to decline.
The Australian dollar , which often trades as a proxy for China and has tended to track the yuan in recent days, gave up early gains to slip 0.05% to $0.6399. It slumped to a nine-month low of $0.6365 on Thursday.
Meanwhile, the world’s biggest cryptocurrency, bitcoin , dipped to a fresh two-month low at $26,172 on Friday, after plunging more than 7% in the previous session.
“There comes a point when it just couldn’t ignore the rise in (U.S. Treasury) yields any longer,” said IG’s Sycamore, who sees the potential for a decline to $24,500.
“The question becomes whether you want your assets in a speculative section of the market when you’re in the middle of a bond market rout.”
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