Forex
Dollar mixed in tight trading range before Fed statement
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© Reuters. People visit a currency exchange office in Istanbul, Turkey July 18, 2023. REUTERS/Dilara Senkaya/File Photo
By Karen Brettell
NEW YORK (Reuters) -The dollar edged lower against the euro and higher against the yen on Tuesday, but failed to find strong direction ahead of the conclusion of the Federal Reserve’s two-day meeting.
The U.S. central bank is expected to leave interest rates unchanged on Wednesday and investors will focus on any clues from Fed Chairman Jerome Powell on the likelihood of a rate cut in March.
Solid U.S. economic data has led traders to pare bets of a March cut to a 42% probability, from around 89% a month ago, according to the CME Group’s (NASDAQ:) FedWatch Tool.
The Fed may “feel more confident than they were in December that rates are restrictive enough to bring inflation down,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
But the Fed also could indicate that it is “not in as much of a hurry as the market expects to cut rates,” Chandler added. The central bank could also suggest that it does not want rates to be too restrictive as it aims to generate a soft economic landing, Chandler noted.
Many analysts expect the Fed’s first rate cut will be aimed at preventing too wide a gap between inflation and the fed funds rate, as this would tighten financial conditions more than the Fed intends.
Treasury yields fell and the dollar weakened after Powell in December indicated that the Fed was pivoting to an easing cycle.
The was last down 0.07% at 103.39. The currency is largely seen as consolidating before Wednesday’s Fed decision and highly anticipated U.S. jobs data for January due on Friday.
Data on Tuesday showed that U.S. job openings unexpectedly rose in December while U.S. consumer confidence increased to a two-year high in January.
Friday’s data is expected to show that employers added 180,000 jobs in January.
The euro gained after data showed the euro zone avoided a technical recession in the fourth quarter. It was last up 0.13% at $1.08460.
Gross domestic product (GDP) in the 20 countries sharing the euro was flat in the fourth quarter against the previous three months, mainly because of strong growth in Portugal and Spain and a modest increase in Italy, while the German economy shrank in the final three months of 2023.
The dollar has rebounded against the single currency this year on expectations that the U.S. economy will fare better than the euro zone.
Investors are fully pricing in a rate cut by the European Central Bank in April.
“For the ECB, (Tuesday’s) figure eases the pressure somewhat, but it is clear that the so-called soft landing being pursued by (ECB President Christine) Lagarde has been somewhat softer than many would have liked,” said Joshua Mahony, chief market analyst at Scope Markets.
Sterling slid 0.11% to $1.26925 ahead of the Bank of England’s monetary policy meeting this week.
The U.S. currency rose 0.09% to 147.62 against the yen.
Japan’s jobless rate fell to 2.4% in December from the previous month, government data showed on Tuesday, just under economists’ median forecast of 2.5% in a Reuters poll.
In cryptocurrencies, bitcoin rose 0.91% to $43,555.
Forex
Major Russian lenders say yuan coffers empty, urge central bank action
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By Elena Fabrichnaya
MOSCOW (Reuters) – Major Russian banks have called on the central bank to take action to counter a yuan liquidity deficit, which has led to the rouble tumbling to its lowest level since April against the Chinese currency and driven yuan swap rates into triple digits.
The rouble fell by almost 5% against the yuan on Sept. 4 on the Moscow Stock Exchange (MOEX) after the finance ministry’s plans for forex interventions implied that the central bank’s daily yuan sales would plunge in the coming month to the equivalent of $200 million.
The central bank had been selling $7.3 billion worth of yuan per day during the past month. The plunge coincided with oil giant Rosneft’s 15 billion yuan bond placement, which also sapped liquidity from the market.
“We cannot lend in yuan because we have nothing to cover our foreign currency positions with,” said Sberbank CEO German Gref, stressing that the central bank needed to participate more actively in the market.
The yuan has become the most traded foreign currency on MOEX after Western sanctions halted exchange trade in dollars and euros, with many banks developing yuan-denominated products for their clients.
Yuan liquidity is mainly provided by the central bank through daily sales and one-day yuan swaps, as well as through currency sales by exporting companies.
Chinese banks in Russia, meanwhile, are avoiding currency trading for fear of secondary Western sanctions.
At the start of September, banks raised a record 35 billion yuan from the central bank through its one-day swaps.
“I think the central bank can do something. They hopefully understand the need to increase the liquidity offer through swaps,” said Andrei Kostin, CEO of second-largest lender VTB, stressing that exporters should sell more yuan as well.
The acute yuan shortage also follows months of delays in payments for trade with Russia by Chinese banks, which have grown wary of dealing with Russia after U.S. threats of secondary Western sanctions. These problems culminated in August in billions of yuan being stuck in limbo.
Russia and China have been discussing a joint system for bilateral payments, but no breakthrough is in sight. VTB’s Kostin said that since Russia’s trade with China was balanced, establishing a clearing mechanism for payments in national currencies should not be a problem.
Forex
Bank of America sees more downside for the dollar
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Investing,com – The US dollar has stabilized after a sharp fall in August, but Bank of America Securities sees more troubles ahead for the US currency.
At 07:20 ET (11:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.077, having largely held its course over the last week.
That said, the US currency is still down 1.6% over the month.
The dollar’s selloff last month stood out in a historical context, according to analysts at Bank of America Securities, in a note dated Sept. 5.
The greenback has since stabilized, however, despite the outsized weakness, the US bank still sees three reasons to stay bearish on the Dollar Index (DXY).
Following similar episodes of bearish DXY breakouts, the index has tended to continue its downtrend, the bank said.
In the last 3 analogs, DXY index fell on average for another 4% before reaching a bottom. Extending this analysis to bilateral USD/G10 pairs suggests a continuation of the USD downtrend is more likely vs EUR, GBP, and AUD than SEK, NOK, and CHF in G10.
While the DXY made a new year-to-date low in August, broad nominal and real USD trade-weighted indices have stayed at Q4 2022 levels and would suggest the USD remains overvalued.
The USD selloff in 2024 has been concentrated in and other European currencies, leading to DXY divergence from other USD indices.
The bank also noted US 10y Treasury yield’s tendency to fall after the first Federal Reserve cut, while global financial conditions are set to loosen further.
“USD may see more weakness as other central banks, particularly the ones that cut policy rates ahead of the Fed, can now afford to let the Fed do some of their work and indirectly support global economies outside of the US,” BoA added.
Forex
Dollar’s demise appears overstated – JPMorgan
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Investing.com – The US dollar has had a difficult summer, dropping substantially during the month of August, but JPMorgan thinks those predicting the demise of the U.S. currency are getting ahead of themselves.
At 06:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.127, having lost 1.6% over the course of the last month.
“Diversification away from the dollar is a growing trend,” said analysts at JPMorgan, in a note dated Sept. 4, “but we find that the factors that support dollar dominance remain well-entrenched and structural in nature.”
The dollar’s role in global finance and its economic and financial stability implications are supported by deep and liquid capital markets, rule of law and predictable legal systems, commitment to a free-floating regime, and smooth functioning of the financial system for USD liquidity and institutional transparency, the bank added.
Additionally, the genuine confidence of the private sector in the dollar as a store of value seems uncontested, and the dollar remains the most widely used currency across a variety of metrics.
That said, “we are witnessing greater diversification and important shifts in cross-border transactions as a result of sanctions against Russia, China’s efforts to bolster usage of the RMB, and geoeconomic fragmentation,” JPMorgan said.
The more important and underappreciated risk, the bank added, is the increased focus on payments autonomy and the desire to develop alternative financial systems and payments mechanisms that do not rely on the US dollar.
“De-dollarization risks appear exaggerated, but cross-border flows are dramatically transforming within trading blocs and commodity markets, along with a rise in alternative financial architecture for global payments,” JPMorgan said.
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