On Friday, the US dollar saw a rise in demand because of pessimism surrounding the global economic outlook. Meanwhile, considered a growth proxy, the Australian dollar fell to a two-year low.
Dollar in demand
Soaring inflation and the aggressive interest rate hiking by central banks in order to combat the rising prices and has resulted in massive sell-offs across different markets. This has boosted demand for assets that are considered safer bets, such as the US dollar.
Market analysts said that people buy dollar assets when they get worried and this is exactly what is happening. On Friday, the safe-haven currency climbed, even as worries about an economic downturn sent yields on 10-year Treasury bonds to lows of one month.
For now, the dollar is swaying between worries that there will continue to be aggressive hiking in the interest rates by the US Federal Reserve in order to cool down inflation and the possibility that this would trigger an economic recession.
US manufacturing activity data on Friday showed that there was a bigger-than-expected slowdown in June, as there was a fall in new orders received that had not happened in two years. This had last been seen in the early days of the pandemic and is a clear indication that the economy is on its way to a slowdown.
This has pushed down expectations of interest rate hikes from the US Federal Reserve. The latest bets from traders have priced in a peak interest rate of 3.32% next year in March. Before the meeting of the US central bank on June 14th, this had been 4%. Currently, the benchmark rate has already been increased to 1.58%.
There was a 0.36% gain in the dollar index, which measures the currency against a basket of others, as it rose to 105.12. The greenback is just below 105.79, which is a 20-year high that it hit on June 15th. A drop of 0.56% was recorded in the euro, which brought it down to $1.0424. On May 13th, the single currency had reached $1.0349, which is the lowest in five years.
In June, the inflation in the eurozone had reached another record high, while the bloc saw manufacturing production decline for the first time after 2020. This month, an increase in the interest rate will come from the European Central Bank, which would be the first in more than a decade.
However, there is confusion regarding the size of the hike. As for risk-sensitive currencies, they had underperformed on the day. There was a decline in the Australian dollar that brought it to its lowest value after June 2020 to 67.64.
Market analysts said that the start of the second half of the year was a risk-off, as commodities and equities were down, which obviously means that the dollar would strengthen across the board. On Thursday, the Reserve Bank of Australia is scheduled for its policy meeting and is expected to hike the interest rate by 50 basis points.