Sunday, December 10

Russian gas halt steps up pressure on euro, sterling

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SINGAPORE — The dollar hit a 20-year high against a basket of peers on Monday, with sterling and the euro the biggest losers as Russia’s halt on gas supply down its main pipeline to Europe has sparked concerns over energy prices and growth.

The euro touched $0.9901 in early Asia trade, just above last month’s trough of $0.99005. Sterling hit a 2-1/2-year low at $1.1458, and remained close to its pandemic nadir.

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Russia scrapped a Saturday deadline for flows down the Nord Stream pipeline to resume, citing an oil leak in a turbine. It coincided with the Group of Seven finance ministers announcing a price cap on Russian oil.

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Similarly, the pound has also been weighed down by concerns over rising energy costs. British foreign minister Liz Truss said over the weekend she would set out immediate action to tackle rising energy bills and increase energy supplies if she is, as expected, to become Britain’s next prime minister.

The yen, at 140.32 per dollar, was under pressure near a 24-year low. The risk-sensitive Australian dollar slid 0.4% and was near a seven-week low at $0.6782.

The US dollar index hit a new two-decade high, surging to a top of 110.08.

“The first order effect seems to be that the heightened geopolitical risk and consequent adverse global demand shocks will probably be the effects dominating,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore.

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“The adverse demand shocks in a very unsavory geopolitical environment is probably going to trigger, and reflect, safe demand for the US dollar … the European currencies are perhaps going to be the worst hit and on the back foot.”

Outsized rate hikes are on the cards this week. Markets have priced about a 75% chance of a 75 basis point (bp) hike in Europe and an almost 70% chance of a 50 bp hike in Australia.

“One would have anticipated that a hawkish ECB should deliver some kind of a tailwind to the euro. But instead what you might get is the policy tradeoff and dilemma biting in,” Varathan said.

In the United States, pricing for a 75 bp hike this month has pared back somewhat after a mixed jobs report on Friday, that contained a few hints of a loosening labor market.

Fed funds futures imply about a 57% chance of a 75 bp hike .

Elsewhere in Asia, the dollar rose 0.3% against the offshore yuan to 6.9384, as worries linger over COVID-19 lockdown measures in the country.

China’s southern tech hub of Shenzhen said it would adopt tiered anti-virus restriction measures beginning on Monday, while Chengdu announced an extension of lockdown curbs, as the country grapples with fresh outbreaks.

(Editing by Jacqueline Wong)