China Driving Dollar More Than Fed Hikes, BofA Strategists Say

(Bloomberg) — While much of the main target in currency markets right away is how the prospect of slowing Federal Reserve rate hikes has helped fuel dollar weakness, the largest factor could also be internationally in China.

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That’s in keeping with Bank of America Corp. strategists, who tracked a measure of Chinese “reflation assets” against a dollar index. The correlation between the 2, which has tightened since November, suggests sentiment around China’s emergence from Covid-19 lockdowns will proceed to maneuver the greenback.

“The recovery in China reflation sentiment has likely been a very important driver of dollar depreciation, potentially greater than US rates which haven’t fallen much,” wrote strategists Adarsh Sinha and Janice Xue in a note dated Tuesday.

The ICE US Dollar Index, which tracks the greenback against six of its global peers, has slipped about 10% since a two-decade high in September. A Bloomberg gauge of strength within the currency has has lost roughly the identical amount over that period.

The moves gathered pace in November because the faster-than-expected resumption of mobility across China bolstered demand for risk-sensitive assets. Easing US inflation expectations have also accelerated the dollar’s depreciation this yr as funds sold last yr’s favored haven asset.

Read more: Goldman, UBS Join Bullish Bets on Global Assets as China Reopens

Some currencies have overshot their expected moves relative to the dollar, in keeping with Bank of America’s regression evaluation based on China’s reopening alone. The euro and yen stand out, partly due to recent hawkish surprises from their central banks.

On the flip side, the Canadian dollar and Norwegian krone have strengthened lower than the China-focused evaluation would suggest, the strategists found.

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