- The Dollar gained ground as Covid cases increased in China.
- Investors are losing hope over Covid restrictions in China.
- The Dollar is getting support from the hawkish tone of the Fed.
Currency futures slid on Monday as the Dollar gained ground amid concerns about the effects of a rise in China’s Covid cases on the global economy. On Monday, students at schools across several Beijing districts buckled down for online classes after officials urged residents in some of the city’s hardest-hit districts to stay at home as COVID cases in the Chinese capital and throughout the country increased.
The most recent wave is putting China’s resolve to adhere to changes to its zero-COVID policy to the test. The changes call for localities to be more targeted in their clampdown measures and steer clear of catch-all lockdowns and tests that have stifled the economy and irritated locals. These moves raised market hopes of a more significant easing. However, some investors are losing hope.
Experts caution that in a nation where the disease is still widely feared, a full reopening calls for an effective vaccination campaign and a change in communication. Oxford Economics stated that because elderly vaccination rates are still relatively low, it only expects an exit from zero-COVID in the second half of 2023.
“From an epidemiological and political perspective, we do not think the country is ready yet to open up,” it said in a Monday report.
The U.S. Federal Reserve’s most recent meeting minutes are due on Wednesday, and judging by how officials have resisted market easing lately, they might sound hawkish. Raphael Bostic, president of the Atlanta Federal Reserve, stated on Saturday that he was prepared to reduce the rate increase in December to a half-point increase. Still, he also emphasized that rates would likely remain high for longer than markets anticipated.
“We are comfortable that the deceleration underway in U.S. inflation and European growth produces a moderation in the pace of tightening starting next month,” said Bruce Kasman, head of research at JPMorgan.
“But for central banks to pause, they also need clear evidence that labor markets are easing,” he added. “The latest reports in the U.S., euro area, and U.K. point to only a limited moderation in labor demand, while news on wages points to sustained pressures.”
As long as labor markets remain tight, central banks will continue raising rates, with the Fed leading the way.