Currencies Soar as China's Stimulus Boosts Risk Appetite

The Australian and New Zealand dollars have reached multi-month highs, while the British pound has hit its highest level in over two years against a weaker US dollar, as China's aggressive stimulus measures have reinvigorated global risk appetite.

Currencies Surge on China's Economic Stimulus

Aussie and Kiwi Dollars Reach New Highs

The Australian dollar peaked at $0.6907 in early Asian trading, its highest level since February 2023, while the New Zealand dollar rose to a nine-month high of $0.6353. These strong gains were fueled by the latest round of support measures announced by China on Tuesday, which included significant interest rate cuts and aid for the country's stock market. The buoyant risk sentiment triggered by these actions has weighed heavily on the US dollar, a traditional safe-haven currency.The New Zealand dollar, in particular, has been the standout performer among its G10 peers, as the market believes the Chinese stimulus measures will be supportive of consumer demand and, consequently, New Zealand's dairy exports. "The kiwi dollar was actually the outperformer amongst its G10 peers, and I think it's because market participants think that the measures announced yesterday are supportive of consumer demand and therefore it's usually a good sign for demand for New Zealand's dairy exports," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

Sterling Hits Two-Year High Against the Dollar

The British pound has also benefited from the weaker US dollar, advancing 0.1% to trade at $1.3429, a level not seen since March 2022. The pound's gains were further bolstered by expectations of less aggressive rate cuts from the Bank of England this year, compared to the more dovish stance of the Federal Reserve."Judging by the financial market reaction, those announcements were actually bigger than market expectations," said Kong, referring to the Chinese stimulus measures. "The kiwi dollar was actually the outperformer amongst its G10 peers, and I think it's because market participants think that the measures announced yesterday are supportive of consumer demand and therefore it's usually a good sign for demand for New Zealand's dairy exports."

Dollar Pressured by Bets on Further Fed Rate Cuts

The US dollar, meanwhile, has come under pressure, with growing expectations of another outsized rate cut by the Federal Reserve in November adding to the headwinds facing the greenback. Markets are now pricing in a 58% chance of a 50-basis-point rate cut at the Fed's next policy meeting, up from just 29% a week ago, according to the CME FedWatch tool.This shift in sentiment has been driven, in part, by data showing that US consumer confidence unexpectedly fell in September, amid mounting concerns over the health of the labor market. "Consumers remain downbeat on the economy," economists at Wells Fargo said in a note. "While we expect there are a number of reasons households are growing more pessimistic, the moderating labor market remains top of mind."Against a basket of currencies, the US dollar last stood at 100.28, languishing near a more than one-year low of 100.21. The dollar index had fallen more than 0.5% in the previous session, its largest one-day percentage fall in a month.

Yen and Euro Remain Steady

Elsewhere in the currency markets, the Japanese yen was steady at 143.19 per US dollar, while the euro gained 0.08% to $1.1188, hovering near a 13-month high hit last month. The euro's resilience can be attributed to the relatively less aggressive stance of the European Central Bank compared to the Federal Reserve, as well as the ongoing strength of the eurozone economy.Overall, the currency markets have been dominated by the ripple effects of China's latest stimulus measures, which have reinvigorated global risk appetite and weighed heavily on the US dollar. As investors continue to monitor the impact of these actions, the Australian, New Zealand, and British currencies are likely to remain in the spotlight, with the potential for further gains in the coming weeks and months.