Investors’ risk appetite took another hit after St. Louis Federal Reserve President James Bullard said on Friday that the U.S. central bank’s shift this week toward a faster tightening of monetary policy was a “natural” response to economic growth and particularly inflation moving quicker than expected as the country reopens from the coronavirus pandemic.
“I think this is a direct echo of the 2013 taper tantrum. You are seeing a perceived shift in the Fed’s reaction function driving investors into the safety of the U.S. dollar,” said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.
With investors pricing in a sooner-than-expected tapering of extraordinary U.S. monetary stimulus, the euro and the yen have come under selling pressure over the last few trading sessions.
“Essentially, the entire world was short the dollar going into this, everyone from speculative traders to corporates to investors,” Schamotta said.
“You are seeing a wholesale unwind here,” he said.
The unwind of sizeable bearish bets against the dollar is expected to provide support for the greenback in coming days, investors said.
Goldman Sachs Asset Management’s head of currency, Arnab Nilim, who had been short the U.S. currency headed into the June Fed meeting, told Reuters he has reduced the position and expects the U.S. dollar to perform well, especially against the low-yielding currencies.
With a dovish European Central Bank seemingly far behind the Fed in the monetary policy cycle, traders will be reluctant to buy euros against dollars.
“The U.S. central bank is one step ahead and as a result USD is likely to remain well supported against the EUR,” Commerzbank strategists said in their daily note.
With equity markets hurting, the Australian dollar – seen as a proxy for risk appetite – was down 0.68% at 0.74995, its lowest since December 2020..
Sterling extended its fall against the U.S. dollar on Friday, dropping below $1.39, hurt by the Fed’s hawkish surprise and an unexpected fall in Britain’s retail sales.
The risk-off move hit crypto currencies as well, with bitcoin failing to get a lift from the news that Spanish bank BBVA would open a bitcoin trading service to all private banking clients in Switzerland. Bitcoin was down 7.0% at $35,451.09.
For a look at all of today’s economic events, check out our economic calendar.
(Reporting by Julien Ponthus and Tom Westbrook; Editing by Catherine Evans, Andrea Ricci and Jonathan Oatis)
