US Dollar Surges as Hawkish Fed Expectations Fuel Risk-Off Trading
The US dollar has continued its upward trend, reaching levels not seen since before the US Treasury's announcement to increase long-term debt buybacks on August 19th. The stronger dollar is attributed to hawkish repricing of Fed rate hike expectations, with market participants now pricing in almost 100bps of hikes in the year ahead, fully reversing last year's rate cuts that totaled 75bps.
The ongoing move higher in bond yields has been a concern for investors, as it could trigger a deeper correction lower for risk assets. Despite this, global equity markets have held relatively well, with MSCI's global equity index remaining close to recent record highs and declining by around 2.5% from its peak in mid-August.
Looking at currency performance since the dollar index bottomed on September 9th, high beta commodity currencies such as the New Zealand and Australian dollars have underperformed alongside the Swedish krona. This is consistent with risk-off trading. Similar price action has been evident amongst emerging market currencies, where heat commodity and high-yielding currencies have underperformed.