Dollar poised for third week of sharp gains as recession fears grip markets

The dollar was on track to notch up its third week of sharp gains as weak Chinese economic data compounded fears about a global recession.

The dollar index, which measures the currency against six others, added 0.1 per cent on Friday to remain around a 20-year high — taking it up 1.5 per cent for the week.

Boosted by haven buying as well as expectations of the US Federal Reserve raising interest rates again this month, the index has climbed 4 per cent in the past three weeks — its biggest ascent over that timeframe since 2020.

In equity markets, the FTSE All-World index of developed and emerging market shares traded steady on Friday morning but was on course for a weekly loss of more than 3 per cent, taking its year-to-date fall to 22 per cent.

Hong Kong’s Hang Seng index, the main Chinese stock market accessible to international investors, fell 2.1 per cent on Friday, taking it 6.5 per cent lower for the week in its largest weekly fall since March 2020.

“It is all about recession risk in the market right now,” George Saravelos, strategist at Deutsche Bank, said in a note to clients, as “the market keeps bringing forward the timing of a recession and (rightly) raises the probability of a hard landing”.

International oil benchmark Brent crude, which on Thursday fell to levels last seen before Russia’s invasion of Ukraine, was on track for a 7.7 per cent weekly loss.

China’s economy expanded by just 0.4 per cent in the three months to June, compared with the same period last year, widely missing economists’ expectations for a 1.2 per cent rise amid stringent lockdowns driven by Beijing’s battle to eradicate coronavirus.

In the US, soaring inflation and market expectations of the Fed raising interest rates to more than 3.5 per cent by next February have combined with downbeat business activity data to darken the economic outlook.

Meanwhile, European governments are facing up to a worsening cost of living crisis as Russia cuts gas supplies in retaliation for western support of Ukraine.

In European equities, the regional Stoxx 600 index rose 0.2 per cent in early dealings on Friday, with London’s FTSE 100 up 0.2 per cent and Germany’s Xetra Dax adding 0.3 per cent. The Stoxx is trading about 16 per cent lower for the year.

The euro, which fell below $1 earlier this week for the first time in 20 years, was steady on Friday at $1.001.

Government bonds rallied on Friday as economic uncertainty boosted demand for the low-risk assets.

The yield on Germany’s 10-year Bund, which falls as the price of the instrument rises and functions as a barometer for eurozone borrowing costs, fell 0.1 percentage point to 1.08 per cent.

In US Treasury markets, the yield on the 10-year note fell 0.04 per cent to 2.92 per cent, down from about 3.5 per cent a month ago.

The two-year yield, which follows interest rate expectations, fell 0.05 percentage points to 3.1 per cent as futures markets scaled back earlier predictions of the Fed raising its main interest rate by as much as 1 percentage point this month.

The two-year yield has remained higher than the 10-year yield since last week, in a so-called inverted yield curve pattern that has historically preceded recessions.

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