The dollar climbed on Monday as sentiment soured after China said it is sticking with its strict COVID restrictions, quashing hopes of an imminent reopening in the world’s second-largest economy which had earlier fired a broad rally in riskier assets.
China said over the weekend that it will persevere with its “dynamic-clearing” approach to COVID-19 cases as soon as they emerge, giving little indication it would ease its outlier zero-COVID strategy nearly three years into the pandemic.
The dollar gained 0.9% on the Chinese offshore yuan to 7.237 in early Asia trade, while the risk-sensitive Australian and New Zealand dollars were also among the biggest losers, both falling nearly 1%.
The Aussie was last down 0.66% at $0.6427, while the kiwi fell 0.7% to $0.5887.
The two currencies were huge beneficiaries of a broad rally on Friday – rising nearly 3% – as speculation that China could soon end its COVID restrictions gathered pace and buoyed risk appetite.
Elsewhere, sterling edged 0.42% lower to $1.1324, while the euro slipped 0.3% to $0.9930, reversing their roughly 2% jump on Friday.
“Any rally in the Aussie, as well as the other currencies, will likely prove short-lived, given China is still very committed to its approach to the COVID outbreaks,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
Against the Japanese yen, the dollar was up 0.26% at 147.05.
Investors were also assessing Friday’s U.S. jobs report which showed that firms added a more-than-expected 261,000 jobs in October and hourly wages continued to rise, evidence of a still-tight labor market.
But hints of some easing of market conditions, with the unemployment rate rising to 3.7%, added to the case that the Federal Reserve could slow its pace of future rate increases and capped the dollar’s gains.
Against a basket of currencies, the U.S. dollar index firmed at 111.09.
“It was, overall, a pretty mixed report,” said Kong. “Judging by market reaction, investors really focused on the lift in unemployment rate, and that might have led to market participants scaling back their expectations on the Fed funds rate.”
Four Federal Reserve policymakers on Friday also indicated they would still consider a smaller interest rate hike at their next policy meeting.
Fed funds futures now show that markets are pricing in a 69% chance of a 50-basis-point rate hike at the Fed’s December meeting, with the next key data point being Thursday’s U.S. inflation figures.
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