Fading risk appetite boosts the dollar vs commodity rivals – Capital.com

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The dollar was firmer on Friday, buoyed by a flight from risk as equity markets slid, and the growing belief that the Federal Reserve will embark on a monetary tightening cycle following its November policy meeting.

The dollar index, a measure of the US currency’s strength relative to a basket of its rivals, climbed 0.1% to 94.26. On Thursday, the index hit a 12-month high of 95.5.

Gains for the greenback were most pronounced against its commodity-dollar rivals – the currencies of Canada, Australia and New Zealand.

Aussie dollar

The Aussie dollar fell 0.3% to $0.7206 against its US namesake as interest rate expectations favoured a first move by the Federal Reserve despite the withdrawal of some policy support from the Reserve Bank of Australia in the form of fewer weekly asset purchases.

“The RBA has been very prescriptive in its dovish forward guidance, suggesting that normalisation in its interest rate policy will lag that of the US noticeably,” said Jane Foley, senior forex strategist at Rabobank.

Meanwhile, the commodity currencies have found little support recently from the prices of the raw materials and agricultural products that support their economies.

Iron ore – which accounts for nearly a quarter of Australia’s total exports – was close to $220 a tonne in July but has since fallen to $117. This is mostly due to China, Australia’s biggest trading partner, putting curbs on steel production.

Foley added: “Chinese factory curbs suggest that prices still face strong headwinds in the medium-term. Some comfort will come in the form of better prices for coal and LNG [liquefied natural gas], even though soured relations between Australia and China are a continued threat to trade between the two nations.”

Canadian dollar

Canada’s dollar was down 0.4% to CAD1.2723 against its southern neighbour and has struggled to find support from rising natural gas and oil prices in recent sessions as its interest rate outlook also lags the US.

“Ultimately, the Canadian dollar should still be able to count on a supportive domestic story, but the short-term fate for the currency remains mostly reliant on the global risk dynamics,” said Francesco Pesole, FX strategist at ING.

Kiwi dollar

New Zealand’s dollar was also lower – down 0.2% to $0.6881 against its US counterpart despite growing expectations that the Reserve Bank of New Zealand will raise interest rates when its policy-setting committee meets next week.

Again, fading global risk sentiment accounted for the losses as higher market volatility undermined confidence in the carry trade – a risky strategy where investors fund trades in high-yielding currencies such as the New Zealand dollar using low-yielding currencies such as the dollar or yen.

Read more: Economic preview – US payrolls to give clue on Fed taper

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