'Big Step Outlook' Dollar Hits Highest in 2 Years... Yuan Plummets Amid 'Lockdown Concerns'

by Park Pyunghee

Published 26 Apr.2022 10:45(KST)

Dollar Index 3-Year Trend

[Asia Economy Reporter Park Byung-hee] The value of the US dollar has surged to its highest level in two years. The war in Ukraine and China's COVID-19 lockdown measures have heightened economic uncertainty, highlighting the appeal of the dollar as a safe-haven asset. Expectations that the US central bank, the Federal Reserve (Fed), will raise the benchmark interest rate by a significant 0.5 percentage points to curb inflation are also bolstering the dollar.

Major foreign media reported on the 25th (local time) that the dollar index, which reflects the relative value of the dollar against six major currencies, surpassed 101 for the first time since March 2020. On that day, the dollar index rose as much as 0.8% from the previous day to 101.86. The dollar index has increased by 12% over the past year.

The dollar's strength is accelerating as the Chinese yuan has sharply depreciated in comparison. Concerns have emerged that China may impose lockdown measures not only in Shanghai but also in the capital, Beijing, increasing worries about a slowdown in the Chinese economy. The number of new COVID-19 cases in Beijing, which had been below single digits, began to surge from the 23rd, rising to over 20 cases.

Foreign media reported that the yuan's decline over the past three days is the largest in nearly four years. China's COVID-19 lockdown measures could exacerbate supply chain disruptions, which may act as a factor driving up inflation. This could, in turn, prompt the Fed to continue its tightening measures.

Expectations for a US interest rate hike are rising rapidly. Currently, the interest rate futures market anticipates that the US benchmark interest rate will rise to 2.7% by the end of this year, up from just 0.8% at the beginning of the year. There are forecasts that the so-called "big step," a 0.5 percentage point rate hike, will occur three times.

The rapid rise in US Treasury yields is also a factor strengthening the dollar. The increase in yields is leading to more purchases of US Treasury bonds, fueling demand for the dollar. The 10-year US Treasury yield nearly doubled, rising from 1.51% at the end of last year to 2.82% on the 26th.