Powell’s rate hike till inflation breaks makes dollar king trade

Bloomberg

The surging dollar is showing there’s only one macro asset worth buying when the Federal Reserve tightens above its long-term neutral rate.
Traders offloaded stocks, bonds and major currencies for a second day after the US central bank raised rates for a fifth time this year. The yen, the biggest Group-of-10 loser, briefly slid past 145 per dollar, prompting Japan’s top currency official Masato Kanda to warn the
government may step in.
The relentless rise in the dollar is heaping pressure on
authorities to defend their currencies, although a depleting stock of reserves leaves them with less firepower as capital outflows intensify.
Even China’s central bank — which has more than $3 trillion of reserves — has seen its currency drop to levels last seen during the 2020 pandemic, which is also when the dollar was the haven of choice.
“Even the PBOC can’t fight dollar strength — not when the Fed is hiking aggressively and the PBOC has been easing policy recently,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. “Dollar strength looks set to continue as the Fed has signaled clearly their intent to take rates well into restrictive territory.”
The yen fell as much as 0.9% to head toward the 146.78 level where the authorities last intervened to prop it up in 1998. Officials have stepped up verbal warnings in recent weeks and the BOJ was said to have conducted a so-called rate-check on September 14, a move that’s seen as a precursor to
intervention.
The onshore yuan was set for a fourth day of declines in the longest losing streak since June. The People’s Bank of China has sought to support the currency by setting its fixing at stronger-than-expected levels in every single session for nearly a month.
“There are still ammunition that the PBOC can tap on to slow the yuan depreciation,” said Fiona Lim, senior foreign-exchange strategist at Malayan Banking Bhd.
“But the central bank is clearly trying to pace this out, especially when external forces of global growth fears and policy tightening are dominant.”
The Fed raised borrowing costs by 75 basis points for the third time in a row and forecast a further 1.25 percentage points of tightening before year end. Its neutral rate stands at 2.5%.
The surging dollar also pummeled other asset classes.