Fed effect stirs global FX moves as mighty dollar runs rampant

The dollar is steamrolling currencies from Japan to South Africa and the UK as bond market bets on higher-for-longer US rates gave fresh fuel to the greenback’s rally, triggering a vocal pushback from officials in various countries.

The yen dropped to a fresh 24-year low versus the greenback and speculation is swirling about the prospects for direct intervention, while the euro and British pound have been battered amid Europe’s escalating energy crisis. South Korea’s won weakened to levels not seen since 2009 and the rand was the next-worst emerging-market performer on the day. China’s yuan, meanwhile, was within a whisker of cracking the psychological 7 barrier.

The moves pushed the Bank of Korea to hold an emergency meeting and issue a statement saying it would take active steps to stabilise the foreign-exchange market. In Japan, it prompted the strongest warnings to date from senior government officials aimed at stemming the yen’s slide.

A Bloomberg gauge of the greenback climbed to a record high, helped by what has become the steepest-ever surge in real yields. The currency’s surge this year has been fueled in large part by a tightening of Federal Reserve policy and increasingly hawkish rhetoric of late has added further fuel.

Markets across the Asia-Pacific have been in particular focus. The Philippine peso recently hit record lows, and currencies of South Korea, Singapore, Malaysia and New Zealand touched levels that haven’t been seen in two years or more.

“Financial stress from decreasing dollar supply will become even more pronounced in weaker economies,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo. “Asian currencies are expected to grind lower” as the world economy slows.

The Fed’s extreme hawkishness sets up a stark policy divergence with the Asia’s two largest economies — China and Japan. The People’s Bank of China is striving to slow the yuan’s slide even as it deploys an array of stimulus measures to try and nurse an ailing economy fighting the impact of Covid-zero lockdowns. In Tokyo, the Bank of Japan is doubling down on the world’s most-dovish policy.

But the net result is pressure on their currencies, while peers around the region are not immune to the rampant greenback.

Treasury yields surged Tuesday as data showing a surprising rebound in the services sector reinforced expectations the Fed will hike interest rates this month by three-quarters of a percentage point for a third-straight meeting. Policy makers in Europe and Canada are also expected to deliver their own outsized hikes this week.

Almost every asset class is facing pressure, with global bonds entering their first bear market in a generation and global stocks down more than 20% so far this year.

“After a prolonged period of low interest rates, the global economy now needs to adjust to higher rates for longer, in addition to heightened geopolitical tensions which will be a source of volatility for financial markets,”said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd.

The yen slumped past 144 per dollar on Wednesday, brushing off the strongest warnings to date from officials. Chief Cabinet Secretary Hirokazu Matsuno told reporters he’s concerned about recent rapid, one-sided moves and Japan would need to take necessary action if they continued.

China’s currency extended its own slide even after the PBOC set its strongest fixing on record, weakening past 6.99 per dollar as trade data came in softer than projected. The move signals policy makers’ intentions to rein in the yuan that’s weakening toward the key 7 per dollar level last touched on June 2020.

The Bank of Korea said recent won weakness has been “fast” compared to the country’s economic fundamentals and it will review the latest circumstances in financial and foreign-exchange markets.

The dollar’s dominance is doing plenty of damage outside Asia too. The euro has fallen below parity against the dollar for the first time in 20 years, while the pound is close to touching levels last seen in 1985.