By Peter Nurse
Investing.com - The U.S. dollar stabilized in early European trade Tuesday, but remained near a two-year high on demand for this safe haven as traders fretted about the impact on global growth from China’s COVID lockdowns while the Federal Reserve prepares for more aggressive tightening.
At 3:15 AM ET (0715 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded just higher at 101.787, after hitting a two-year peak of 101.86 overnight.
The index has gained almost 3% so far this month, which would be its largest month of gains since November 2015.
“Risk-off trades dominate global financial markets at the start of a new trading week as resurgent concerns over Chinese lockdowns make investors nervous about the outlook for the world’s second-largest economy,” said Kevin Beckham, an independent financial expert.
The COVID-19 lockdown in the Chinese city of Shanghai has now been in place for around a month, and fears are growing that these stringent measures will be expanded with a mass-testing campaign currently underway in Beijing’s most populous district after a number of cases were discovered in the nation’s capital.
The International Monetary Fund last week cut its growth forecast for China this year to 4.4%, well below Beijing's target of around 5.5%, citing the risks of widespread COVID-19 lockdowns.
Also boosting the dollar is the expectation of substantial rate hikes by the Federal Reserve this year, starting with a likely 50 basis point rate hike at the central bank’s next meeting in May.
USD/CNY dropped 0.2% to 6.5451, recovering from a year’s high seen on Monday after the People's Bank of China said it would cut the amount of foreign exchange banks must hold as reserves.
AUD/USD rose 0.4% to 0.7208, rebounding from its two-month low overnight, with the Chinese lockdowns weighing on commodity prices.
USD/JPY fell 0.2% to 127.87, edged back slightly from last week's 20-year low of 129.40, while GBP/USD slipped slightly to 1.2735.
EUR/USD dropped 0.1% to 1.0708, marginally above the two-year low of 1.0697 hit on Monday, with even the re-election of French President Emmanuel Macron failing to support the single currency.
“The euro is now pressured by a stronger dollar, risk-off trades, geopolitical uncertainty, hawkish Fed, concerns over energy security in the EU, and rising economic worries in the region,” added Beckham. “In other words, the euro is unlikely to see significant gains in the near term.”