The US dollar was riding high in Asia on Friday as unceasing speculation about the prospects for rising US interest rates undermined commodity prices and spurred investors to unwind leveraged trades in higher-yielding currencies.
Talk the Federal Reserve might take a hawkish turn at its policy meeting next week, possibly by dropping its commitment to keeping rates low, has seen US Treasury yields steadily creep higher and injected new life into the dollar.
This sudden outbreak of volatility has prompted some to pare back on carry trades, where they borrow at low rates in euros and yen to buy higher-yielding assets such as commodity-linked or emerging market currencies.
Victims included the Canadian dollar, which plumbed a five-month low of C$1.1030, while Australia's dollar hit a six-month low of $0.9053.
Gold, copper prices
The rise of the US currency shoved oil prices to their lowest in two years, while gold sank to an eight-month trough and copper fell to a three-month low.
In contrast, the dollar's gains on the yen were considered positive for Japanese exports, corporate earnings and equities. The broad Topix index added 0.2 per cent and reached its highest level since July 2008.
Global markets
Stocks elsewhere in the region fared less well as investors fretted that even the hint of a shift in Fed policy might spark a withdrawal of funds from emerging markets. MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.3 per cent at one-month lows.
In Europe, spreadbetters tipped slight opening gains of between 0.1 per cent and 0.2 per cent for the FTSE 100, DAX and CAC 40.
Wall Street was also on guard with the Dow ending Thursday off 0.12 per cent, while the S&P 500 edged up 0.09 per cent and the Nasdaq 0.12 per cent.
US retail sales
While there was little in the way of major data due in Asia, figures on US retail sales due later Friday could fuel speculation over US rates. Economists expect a solid rebound of 0.6 per cent in August, up from a disappointingly flat reading in July and fuelled by a boom in auto sales.
A strong result would only add to speculation the Fed might refine, or even drop, its commitment to keeping rates low for a “considerable time’’ after its asset purchase programme ends.
Yields on the rise
The jitters have been reflected most in short-term yields, with those on two-year Treasuries on track for their highest weekly close since April, 2011.
Yet investors assume any tightening campaign will be much less aggressive than in the past given the restrained outlook for inflation and a still heavily-indebted consumer.
Which is why yields on 10-year Treasuries are currently at 2.55 per cent, well below the 3.3 per cent seen in April, 2011.
Fed policy meet
Indeed, many analysts suspect the majority of voters at the Fed are wary of threatening the recovery with a too-hasty change to policy.
“The market will be on the defensive going into next Wednesday's Fed meeting due to the growing contingent who are convinced a hawkish language change is imminent,’’ said William O'Donnell, head of Treasury strategy at RBS.
“But bearish expectations may surpass what the Fed will deliver,’’ he added. “We think September is a bit premature for a language change and that the Fed is just looking to have the conversation.’’
Stimulus programmes
Still, a rise in US rates seems certain to come sometime next year while the European Central Bank and the Bank of Japan remain committed to massive stimulus programmes.
The diverging outlook for policy is considered generally bullish for the US dollar in the long run and kept it elevated against a basket of major currencies at 84.350.
It also reached a six-year high on the yen at 107.39, while the euro fetched $1.2922 having touched a 14-month trough of $1.2859 earlier in the week.
The pound gained a reprieve from recent selling when a YouGov poll showed supporters of keeping Scotland in the United Kingdom have clawed back a narrow lead over separatists, just one week before Scots vote in a referendum on independence.
On Friday, the pound was at $1.6225 and up on the week's trough of $1.6052.
The rise of the U.S. dollar sent gold to fresh lows at $1,231.95 an ounce.
Brent crude resumed its decline with a fall of 22 cents to $97.86 a barrel, having touched the lowest since July 2012 overnight. US crude eked out a gain of 14 cents to stand at $92.97 a barrel.