Dollar in Best Run Since July on Haven Bid Even as Fed Odds Fall

  • Kiwi, Aussie lead declines among G-10 as China equities slide
  • Reduced Fed expectations undermine greenback versus yen, euro

Turmoil in global markets is boosting the dollar, even as it pushes back market expectations for when the Federal Reserve will next increase interest rates.

An index of the U.S. currency against 10 of its peers rose for a third week, the longest stretch since July, amid demand for haven assets as oil dropped below $30 for the first time in more than a decade and Chinese stocks led a global rout. Futures show 26 percent odds the Fed will tighten policy by its March meeting, down from 41 percent as of the end of last week.

“Trading has switched from monetary policy divergence to growth and commodity concerns with a sprinkling of geopolitical risk,” said Peter Rosenstreich, head of market strategy at Swissquote Bank SA in Gland, Switzerland. “We are increasingly seeing rotation from nations which will be stressed by this backdrop into dollar and yen -- safe havens.”

The Bloomberg Dollar Spot Index rose 0.1 percent to 1,247.54 at 6:55 a.m. New York time, headed for a 0.6 percent gain this week. The three-week run of gains is the longest since the period ended July 24.

The dollar strengthened 1.5 percent to 68.84 cents per Aussie and gained 1.2 percent to 63.99 cents versus its New Zealand peer as Chinese stocks resumed declines Friday. The Shanghai Composite Index slid 3.6 percent, taking this year’s drop to 18 percent and making it the worst performer among major global benchmark measures tracked by Bloomberg.

Bad Neighborhood

“The U.S. will remain the ‘best house in a bad neighborhood’ and will attract capital flows from abroad,” Morgan Stanley analysts led by London-based Hans Redeker wrote in a research note dated Jan. 14. “We remain convinced U.S. dollar bulls. The secular U.S. dollar bull market has more legs.”

The U.S. economy expanded across most of the country in the past six weeks as the job market showed strength that’s failing to stoke broad wage pressures, a Federal Reserve survey released Wednesday showed. It underscored the challenge facing Fed policy makers heading into a meeting later this month: The strong labor market has as yet failed to trigger signs of broader inflation, while sliding commodities put downward pressure on price expectations.

Bullard Cautious

St. Louis Fed President James Bullard, one of the most vocal policy makers in recent months arguing to raise rates, sounded a more cautious note on Thursday by saying the latest tumble in oil prices may delay inflation from returning to the central bank’s 2 percent target.

“The associated decline in market-based inflation expectations measures is becoming worrisome,” Bullard, who votes on policy this year, said in a speech in Memphis, Tennessee.

Two-year Treasury note yields have dropped to as low as 0.86 percent, a level last seen before the U.S. central bank raised rates in December. Even so, investors are still finding the greenback attractive.

“The U.S. dollar still got a bid even though short-term interest rates are falling, simply because of the safe-haven flows,” said Imre Speizer, a markets strategist at Westpac Banking Corp. in Auckland. “We all know China has issues, and those issues have been a partial cause of the risk aversion -- and you suspect that there may be more of these to come throughout the year.”

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