The Perfect Enemy | Dollar steadies as China tightens Covid curbs
December 3, 2022
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The dollar steadied on Tuesday after rallying the previous day as investors flocked to the safe haven currency on worries over China’s Covid flare-ups.

The euro was up 0.2% to $1.0264 after an 0.8% loss on Monday, sterling rose 0.4% to $1.1862, partially reversing its 0.6% fall, and the dollar was at 141.24 yen down 0.6% after a 1.2% gain.

“What’s going on in China is going to take centre stage,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia.

“There does seem to be some … increased restrictions on movement of people, and I think there’s going to be inevitable economic impacts.”

Beijing warned on Monday that it was facing its most severe test of the Covid-19 pandemic, with a surge in Covid cases sparking fresh restriction measures. Deaths from the virus were also recorded in the capital for the first time since May.

Restrictions in Beijing and elsewhere tightened further on Tuesday, though currencies seemed to think the previous day’s moves were sufficient.

MUFG analysts noted that more cautious remarks from Fed officials were also been a factor in the dollar losing some momentum on Tuesday.

Cleveland Fed President Loretta Mester said the central bank can downshift to smaller interest rate hike increments from next month, and San Francisco Fed President Mary Daly said the real-world impact of interest rate hikes is likely greater than its short-term rate target implies.

The major factor driving dollar moves in recent months has been market expectations of how aggressively the Federal Reserve will raise rates.

The dollar has been weakening this month on hopes that the United States is nearing the end of its interest rate hiking cycle, though more hawkish remarks from policy makers disrupted this trend late last week, which also contributed to Monday’s gains.

The fresh bout of risk aversion related to China weighed particularly on the antipodean currencies – often used as liquid proxies for the Chinese yuan – with the Aussie sliding nearly 1% on Monday. It recouped some losses on Tuesday, rising 0.24% to $0.6631.

The dollar fell 0.5% on the offshore yuan to 7.1412, having gained 0.7% overnight.