Forex
Dollar rises after Powell’s comments; euro slips ahead of eurozone CPI
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© Reuters.
Investing.com – The U.S. dollar rose in early European trade Thursday, climbing near to a seven-week high, after the Federal Reserve kept interest rates steady and played down expectations for a March rate cut.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.5% higher at 103.575, close to the highest level since mid-December.
Dollar helped by Powell’s comments
The kept interest rates unchanged at elevated levels at the conclusion of its latest policy-setting meeting on Wednesday.
That was widely expected, but the dollar received a boost after Fed Chair said that recent stickiness in inflation will keep the central bank from carrying out any monetary loosening in the near-term.
Goldman Sachs pushed back its expectation of the Fed starting interest rate cuts to May from March, while maintaining its forecast of five 25 basis points rate cuts this year.
The influential investment bank expects four consecutive cuts starting in May through September and a final cut in December.
“The strong message coming across from the Fed yesterday was that inflation and growth were moving into ‘better balance’, rate cuts would likely be coming but more data was required to give the Fed confidence to start the cycle,” said analysts at ING, in a note.
There’s more labor market data to study later in the session, in the shape of weekly , ahead of Friday’s key monthly report.
Euro slips ahead of eurozone CPI data
In Europe, traded 0.2% lower at 1.0791, ahead of the release of the latest eurozone inflation data, which could provide the policymakers with a push towards cutting interest rates.
The is expected to fall to 2.7% in January on an annual basis, a drop from 2.9% the prior month, and dropping closer to the ECB’s 2% medium-term target.
The European Central Bank has tamed the “greedy beast” of inflation, policymaker Joachim Nagel said earlier this week, in a departure from his usual cautious tone.
“Given the successful disinflation trends and weak activity data, it is therefore more difficult for the European Central Bank than the Fed to push back against early easing expectations,” added ING. “That is why markets still attach a 60% chance to an April rate cut from the ECB.”
traded 0.3% lower at 1.2647 ahead of the Bank of England’s policy meeting later in the session.
The is expected to keep rates unchanged, with Governor having previously stressed it is too early to talk about lower borrowing costs, but the policymakers could offer hints that the central bank is moving towards cutting interest rates this year.
Yen gains as officials discuss monetary tightening
In Asia, fell 0.1% to 146.75, with the yen gaining slightly after minutes from the Bank of Japan’s January meeting showed policymakers actively discussing a move away from its ultra-dovish stance.
edged 0.2% higher to 7.1830, with the yuan remaining under pressure as data continued to suggest a sluggish economic recovery.
A showed that China’s manufacturing sector grew as expected in January, but its pace of growth now appeared to be slowing, while home sales plummeted in January, pointing to more pressure on a worsening property crisis.
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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