September saw a swift rally in US Dollar, and the worst selloff in equities since March last year, as investors fled to the safe-haven currency on the back of a brittle risk environment. The USD Dollar Index (DXY) is now standing at its highest level in a year, stemming from a multitude of factors – rise in Treasury yields, hawkish tilt by the Fed raising expectations for an interest rate hike as early as in 2022, clash in Congress over the looming debt ceiling limits expiring on 18th Oct, as well as fear of contagion from the Evergrande’s debt crisis.
Across the Atlantic, Euro and Sterling tumbled against the greenback, following a more hawkish stance by the Fed. In the recent ECB’s conference, Christine Lagarde attributed the rising inflationary pressures to the reopening of the economy, noting that they are transitory, as wage growth remains stagnant. Meanwhile, BOE left interest rates and asset purchases unchanged while noting that there is now a stronger case for modest tightening on its monetary policy.
Commodity currencies extended their decline, dragged by falling iron and other industrial metal prices as risk sentiment sours, along with soft Chinese demand and the Evergrande’s affair. On the central banks’ front, RBNZ could look to tighten its monetary policy to rein in inflation, supported by improving GDP numbers and declining COVID-19 infection numbers. Meanwhile, RBA announced it would stick to its plans for tapering, but extended its bond-buying programme to mid-February as the country continues to reel from the effects of its lockdowns. Elsewhere, Gold struggled for gains amid a stronger Dollar.