Greenback's comeback

The resumption of the major markets saw European traders buying up dollars in reaction to the weekend’s news.

Singapore stock exchange
Source: Bloomberg

USD strength hurts other currencies
The dollar index gained more than 1%, stomping past $97.0. As a consequence, other major currencies suffered. The Japanese yen was hovering steady near its pivotal Y122 level, and the sideways grind kept the Nikkei on a flat tone on Tuesday. Fresh bids in the dollar during late Asian trading lifted USD/JPY beyond the $122 handle, taking out huge stops sitting atop the level, en route to near eight-year highs of $122.81. EUR/USD on the other hand decisively tumbled below 1.0900.

The theme of a dollar resurgence is going to pose several complications to investors. First, companies with substantial revenue recognised from outside the US will likely see their profits hurt. If the dollar’s strength persists, we could see another quarter or two of weaker growth in US firms’ earnings. Second, a strong dollar means that investors may want to keep most of their exposure to US-denominated assets. Finally, the prices of commodities will be pressured further.

Naturally, gold and oil prices came under pressure on the back of the USD strength. Gold prices slipped below the key $1200 levels, while Brent crude eased below $65. Upcoming data would continue to drive changes to expectations.

The market will certainly look ahead to US data due tonight. In particular, durable goods orders, consumer confidence and new home sales will all be closely watched. Positive readings will reinforce the Federal Reserve chair Janet Yellen’s view of a rate hike, even if it is a symbolic gesture, at some point this year. This will push the dollar up further. I mentioned earlier that we could see a retest of the big 100 level in the dollar index, and that the larger bullish trend would likely resume. Today’s strong dollar rally continues to support the case.

Hang Seng plays catch up
Hong Kong shares popped strongly upon return from a long weekend, tracking solid gains in Chinese equities. However the bullish momentum waned in the afternoon session, with good profit-taking activity seen after the Hang Seng index reached more than its seven-year highs of 28,524. Chinese shares extended its rally with CSI 300 and A50 advancing 1.9% and 0.9% respectively as more positive news came out from China.

Ming Pao reported that the authorities may scrap the aggregate investment quota of the Shanghai-Hong Kong stock connect while also raising the daily quota limit. This raised expectations of more foreign participation in the domestic stock markets. In addition, the International Monetary Fund dropped its view that the yuan is undervalued, bolstering China’s case for the yuan to win reserve currency status at the multinational lender. China has been calling for the IMF to include the yuan in its Special Drawing Rights basket of currencies at a review later this year. IMF’s Markus Rodlauer remarked that the inclusion of the yuan is not a matter of “if” but “when”.

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