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Currencies: U.S. dollar hits 2-year high as investors flee stock market, commodities slump

The U.S. dollar was a prime beneficiary of a flight to quality Monday, with a closely followed index trading at its highest since March 2020 as expanding COVID-19 lockdowns in China and growing expectations for outsize rate increases from the Federal Reserve saw global equities continue to skid and commodity prices plunge.

The ICE U.S. Dollar Index
DXY,
+0.32%
,
a measure of the currency against a basket of six major rivals, was up 0.3% at 101.55 after trading as high as 101.74 — its loftiest since March 2020 when the onset of the COVID-19 pandemic set off a global scramble for greenbacks.

‘Potent cocktail’

The dollar often serves as a haven during periods of geopolitical uncertainty and unsettled markets.

“There’s no shortage of blood on the financial market dancefloor this morning. A poor equity market close on Friday set the stage but the war in Ukraine, the threat to the Chinese economy from Covid restrictions, and the monetary policy rhetoric, led by the Fed but followed all over the world, make a potent cocktail,” said Kit Juckes, global macro strategist at Societe Generale, in a note.

U.S. stocks fell sharply on Friday, with the Dow Jones Industrial Average
DJIA,
-2.82%

dropping nearly 1,000 points for its worst day since October 2020. Global equities slumped Monday, with U.S. stock-index futures pointing to a weaker start, while oil and other commodities were under heavy pressure.

Emmanuel who?

Those events rendered the unexpectedly strong showing of French President Emmanuel Macron, who cruised to victory Sunday over far-right candidate Marine Le Pen, a “non-event” for the euro, Juckes said.

The shared currency
EURUSD,
-0.57%

saw initial support around the election soon give way, trading at a level last seen in March 2020. The DXY is weighted heavily toward the euro. The euro was off its low but down 0.5% versus the dollar at $1.075.

Yuan jitters

The dollar came off highs versus other currencies after the People’s Bank of China cut the amount of foreign reserves banks must hold — lowering the foreign exchange reserve requirement ratio by 1 percentage point, to 8%.

The dollar remained up 0.7% versus the Chinese currency
USDCNY,
+0.89%

at 6.5488 yuan. In offshore dealings, the currency
USDCNH,
+1.03%

traded at 6.577 per dollar, with the U.S. unit up 0.8%. The yuan has fallen sharply versus the dollar as China deals with signs of a sharp economic slowdown.

The yuan took a sharp leg lower on Monday as Beijing started to test millions of residents and began shutting down business districts and some residential areas amid a spike in COVID cases. That led to long lines at supermarkets amid fears a repeat of restrictions seen in Shanghai, with millions now locked down for weeks.

The yuan’s weakness was seen contributing to market jitters on its own A devaluation of the yuan in 2015 sent shockwaves through global financial markets and contributed to a stock-market pullback.

Yen bounce

The dollar lost ground versus the yen, however, with the Japanese currency somewhat reasserting its role as a top haven during bouts of cross-asset volatility. The yen has slumped sharply versus the dollar this year, falling to around a 20-year low versus the dollar as the Bank of Japan maintains ultra-easy monetary policy as Federal Reserve officials have signaled a half-point rate increase is likely when policy makers meet in May, with the potential for further larger-than-usual moves in subsequent months.

The dollar
USDJPY,
-0.34%

was down 0.4% at 128.08 yen in recent trade.

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