US dollar climbs to two-year peak as risk appetite tumbles; yuan drops

Summary

• China's yuan falls to one-year low vs dollar
• Aussies dollar weakens broadly
• Euro gains, triggered earlier by Macron victory, fade

The US dollar struck a two-year high on Monday as a wave of risk aversion hit global markets, while the Chinese yuan was set for its biggest three-day losing streak in nearly four years on growing worries of an economic slowdown in China.

With war in Ukraine entering a third month and growing concerns of a China-wide Covid-19 outbreak sparking a rout in Chinese stocks, investors dumped currency market darlings like the Australian dollar and the offshore Chinese yuan .

Against a basket of its rivals , the dollar gained 0.6% to 101.75, a level it last tested in March 2020.

"This dollar dominance can only be explained by the fears of Covid continuing to influence China's lack of activity," said Juan Perez, director of trading at Monex USA in Washington.

"Chinese data has been OK, supposedly, per economic figures, but there is growing concern that the No-Covid or zero-Covid measures are creating the need to revise outlooks further downward. China's shutdowns are killing global optimism," he added.

China's yuan fell to a one-year low against the dollar and was last down 0.9% at 6.4575 yuan per US dollar.

The Aussie, which was one of the biggest gainers in currencies in the first quarter of 2022 thanks to surging commodity prices, fell widely. It dropped 1.5% against the US dollar to US$0.7138 and fell 2.1% versus the Japanese yen .

The Norwegian crown also fell nearly 2% versus the US dollar, which last traded up at 9.1235.

Broader currency market volatility gauges ticked higher , with an index rising to its highest levels in more than a month.

BofA Securities strategists said that despite the pickup in currency market volatility, investors were long the Canadian dollar, Aussie, and euro.

The euro's tiny gains after French President Emmanuel Macron's comfortable election victory over far-right rival Marine Le Pen quickly dissipated, with the single currency down 0.9% at $1.0716, against a resurgent dollar.

Latest positioning data for last week showed hedge funds trimmed their long euro bets.

FX positions

Hawkish comments by various policymakers last week also raised the risks of aggressive policy tightening by global central banks. Money markets expect the US Federal Reserve to raise interest rates by a half point at the next two meetings and the European Central Bank to raise interest rates by 25 basis points in July.