King dollar, you reign supreme

A look at the day ahead in markets from Dhara Ranasinghe.

Whoever coined the phrase "king dollar" certainly had good reason for doing so and currency trading this week only confirms that the epithet holds true.

With recession risks running high, the greenback appears to be an ultimate safe-haven for investors.

And the casualties of the dollar's surge? Let's count them: the euro is fast heading towards parity even if it is holding above 20-year lows in Europe this morning. The yen has slumped to its lowest levels in over 20 years, sterling is near its lowest since March 2020 and Russia's rouble has slid 16% this week.

Until the Federal Reserve shows signs of slowing its aggressive rate-hiking cycle, little will change. Minutes of the Fed's June meeting, released late Wednesday, FOMC confirmed the shift toward prioritising price stability over full employment.

No wonder then that Treasury yields shot up on Wednesday and the yield curve, measured by the gap between two and 10-year bond yields, continues to push further into inverted territory.

It's a sign that bond markets suspect aggressive rate hikes to tame inflation, raising the risk of the world's biggest economy tipping into a recession.

Graphic: Inverted U.S. Treasury curve a harbinger of recession, https://fingfx.thomsonreuters.com/gfx/mkt/zdvxoemlrpx/US0707.png

Recession angst meanwhile lingers with world shares caught between growth worries and relief that a slowdown might check a sharp rise in borrowing costs.

Asia shares have edged up from two-month flows and European stock and U.S. equity futures are firmer.

U.S. ADP payrolls data later on will likely be in focus ahead of Friday's non-farm payrolls report.

In the UK, markets have now factored in political turmoil, but headline continue to grab attention as British Prime Minister Boris Johnson defies pressure to quit and faces a mounting rebellion within his ruling party.

And maybe that's just one more reason to stay away from sterling right now and play it safe by sticking with the dollar.

Key developments that should provide more direction to markets on Thursday:

- Russia’s Serge Lavrov attends two-day G20 foreign ministers meeting

- St. Louis President James Bullard

- ECB publishes minutes from 9 June meeting

- UK house prices surge by 13% in 12 months to June, Halifax says

- German industrial output rises less than expected in May - Reuters

- US ADP payrolls/Trade (exports/imports)/initial jobless

- Central bank meetings: Argentina, Poland, Peru, Sri Lanka, Serbia

(Reporting by Dhara Ranasinghe; editing by Saikat Chatterjee)