Safety flows extend dollar rally ahead of Fed

© Reuters. FILE PHOTO: A U.S. dollar banknote is seen in this illustration taken May 26, 2020. REUTERS/Dado Ruvic/Illustration/File Photo

By Tom Westbrook

SINGAPORE (Reuters) - The dollar rallied to a month-high in Asia on Monday as looming catastrophe at indebted developer China Evergrande added extra nerves to a cautious mood, with investors bracing for the Federal Reserve to take another step towards tapering this week.

In trade thinned by holidays in Japan, China and South Korea, the euro fell 0.1% to $1.1710, its lowest since late August.

The Australian dollar fell 0.5% to a three-week low of $0.7227 while sterling and the kiwi also hit multi-week troughs on the rising greenback. The dollar index rose 0.1% to 93.356, its highest since Aug. 23.

"The U.S. dollar is having a bit of a rebound," said Westpac analyst Imre Speizer, drawing support, he added, both from an expectation of imminent asset purchase reductions from the Fed and from caution as stock market selling gathers pace.

"Everyone is eying the Fed, waiting for a tapering signal."

The yen held its own, edging up 0.1% to 109.88 per dollar, while equity markets dropped with concern that an Evergrande collapse could trigger a broader crisis. [MKTS/GLOB]

Evergrande, with $300 billion in debts, has a bond interest payment of $83.5 million due on Thursday and said on Sunday it begun repaying some investors with real estate, sparking selling in other developers and its lenders. (HK)

The fear is that without a bailout, a messy collapse or liquidation ripples through China's property sector at a time when growth is already looking fragile.

Onshore Chinese markets were shut for the mid-Autumn break but the offshore yuan fell through its 200-day moving average to a three-week low of 6.4848 per dollar.

At 0330 GMT, sterling was down 0.1% at $1.3709 and the kiwi down 0.14% at $0.7024. The dollar also made broad gains against emerging markets' currencies and cryptocurrencies fell.

FED FOCUS

Ahead this week, no fewer than a dozen central banks hold meetings, but traders' top focus is on the Fed where expectations for a tapering signal are keeping the dollar bid.

The Fed concludes a two-day meeting on Wednesday and consensus is that it will stick with broad plans for tapering this year but will hold off providing details or a timeline for a at least a month.

Creeping U.S. yields, however, which at the 10-year tenor rose for a fourth straight week last week, point to risks of a hawkish surprise or a shift in projections to show hikes as soon a 2022, both of which could support the dollar.

"What the dollar bulls will be looking for is for the dot plot to show a 2022 lift-off," said analysts at OCBC Bank in Singapore, something which would need only a change of mind from two or three Fed members.

"This would represent an extension of the hawkish-Fed, dollar-positive narrative that had ran slightly out of steam by August."

Among the other major central banks, the Bank of England is expected to leave policy settings unchanged, but traders see potential for gains in the pound if the bank adopts a hawkish tone or more members call for asset purchase tapering.

There is no expectation of policy shifts at the resolutely dovish Bank of Japan on Wednesday, but a day later Norway's Norges Bank is expected to become the first G10 central bank to lift rates.

The Norwegian crown slipped with oil and the rising dollar on Monday to a three-week low of 8.7499 per dollar.

The oil-sensitive Canadian dollar was also on the back foot ahead of an election on Monday where polling points to an advantage for incumbent Prime Minister Justin Trudeau but a likelihood he remains leader of a minority government.

It hit a one-month low of C$1.2801 per dollar.