Dollar smiling from ear to ear

LONDON (Reuters) – FX Signals – Whether investors run for the hills or not after the past week’s stock market shakeout, the episode provides a glimpse of where to run for cover – and the U.S. dollar came up trumps.

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The anxiety about a likely debt default by giant real estate firm China Evergrande – and even feared ripple effects across regional property firms, high-yield debt markets and banks – may not be quite on that scale.

China property nerves are far from over, and financial volatility gauges are their highest in months.

Of course, it’s not all down to stress. The other big event of the week, the Federal Reserve’s latest policymaking meeting, provides alternative fuel for the currency.

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“Our confidence has increased that the dollar is on the cusp of a clearer break-out from either end of the dollar-smile, or indeed both ends concurrently,” the JPMorgan team wrote.

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On the left side of the smile, they see growing angst that world growth has peaked, policy support is being withdrawn, global stocks are overstretched and there are “mounting global tail risks” from China and related geopolitical fears.

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On the right side stands the Fed and “U.S. rate-driven exceptionalism”, they say. Fed policymakers this week are likely to signal the start of U.S. interest rate hikes from late next year and – crucially – up to six increases through to end-2024.

REAL TIME

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This real rate view makes sense to those who see inflation expectations and growth potential dominating a currency’s fortunes.

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And that needs to be set against growth and inflation expectations in Europe or Japan.

“The September FOMC may be a key catalyst driving U.S. (real) yields higher, which we expect to boost the dollar broadly,” they wrote this week.

Dollar smiling from ear to ear

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Dollar smiling from ear to ear