Dollar Strengthens on Renewed Chinese Covid Fears

Beijing Covid

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The Dollar was bid and stocks were lower amidst signs China is tightening restrictions to confront a growing outbreak of Covid-19.

Authorities reported three Covid deaths in the capital of Beijing over the weekend, the first in more than six months.

It is reported there are early indications some authorities are reverting back to a zero-Covid approach, just days after the country announced it was relaxing some restrictions.

A spike in cases over the weekend in the city of Shijiazhuang, close to Beijing, resulted in officials asking residents to stay at home on Monday.

"USD rose across the board in the Asia session because of fears China may further tighten covid restrictions," says Carol Kong, an analyst at Commonwealth Bank of Australia.

Developments in Shijiazhuang came just days after the city eased some controls, including mass testing while allowing students to return to school. This u-turn confirms the challenges facing authorities tasked with taking a more targeted approach to Covid management while keeping cases capped.

Infections have grown to higher numbers than ever before in some regions, potentially reaching a level where the uncontrollable spread is triggered.

"Hopes that China will relax its covid strategy were crushed over the weekend, after the government tightened restrictions in some major cities to deal with rising caseloads. Hence, the notion of a paradigm shift in China seems to have been premature, especially since the recent rescue package for the embattled property sector did not include enough firepower to turn the tide," says Marios Hadjikyriacos, Senior Investment Analyst at

The market response was negative as investors were forced to discount bets that the world's second-largest economy was heading for a more sustained recovery.

"USD is likely to consolidate again this week with few important events scheduled. But if markets rethink their 'glass half full' views on China’s re‑opening, the USD could lift," says Kong.

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Expectations that China might be prepared to drop its zero-Covid policy have grown over recent weeks, fuelling improved investor sentiment amidst expectations the world's number two economy might stoke a recovery in global economic activity.

This positive backdrop proved a headwind to the Dollar which tends to benefit when market fears are rising and global growth expectations are deteriorating.

Any pushback on the China reopening theme is therefore supportive of the Dollar and negative for the Euro and Australian Dollar, which are particularly exposed to Chinese demand.

The Pound would also succumb to losses, but the big panic sell-off of September that resulted in all-time lows will unlikely be attained.

The GBP to USD exchange rate has nevertheless retreated from last week's high at 1.2029 and is quoted back at 1.1807, taking dollar payment rates on Sterling accounts to around 1.1573 and those offered by competitive payment providers to around 1.1774.

The EUR to USD rate was as high as 1.0481 last week but is back at 1.0233, our data suggests bank transfer rates are back below parity and in the region of 0.9954, competitive payment providers are however offering closer to 1.02.

"With bets around an imminent Chinese reopening being unwound, a wave of risk aversion swept through global markets. In the FX arena, the currencies that retreated the most were those with high economic exposure to China or a tight correlation to global risk sentiment, such as the Australian and Canadian dollars. Across the risk spectrum, the US dollar was the main beneficiary," says Hadjikyriacos.

But is the USD Top in?

Some interesting research for Dollar 'bulls' is this week provided by BNP Paribas, where researchers suggest the bottom for stocks in the current bear market has not yet been achieved.

After analysing 100 years of crashes, BNP Paribas finds market bottoms typically require a capitulation event – which is associated with a coordinated spike in volatility, skew, and convexity.

"We have not yet seen this, suggesting that the bottom is not yet in," says Calvin Tse, Head of US Macro research, at BNP Paribas. "Recessionary bear markets historically have often ended with a capitulation. We are calling for a capitulation event in equities next year."

If the bottom in stocks is not in, then the top for the Dollar might not be in either.

This is because the Dollar is anti-cyclical, rising in poor market conditions as investors seek cash as protection from depreciating assets.

If BNP Paribas are right, those holding out for a stronger Dollar could benefit by holding tight.