Forex
Dollar rebounds as Fed’s Powell sees March rate cut as unlikely
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© Reuters. FILE PHOTO: U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo
By Karen Brettell
NEW YORK (Reuters) – The dollar gained on the euro and pared losses against the yen on Wednesday after Federal Reserve Chair Jerome Powell said that a rate cut in March was not the U.S. central bank’s “base case.”
It came after the Fed offered a neutral and less dovish outlook on rates than many investors had expected.
The Fed gave an “extremely neutral, non-committal statement”, said Karl Schamotta, chief market strategist at Corpay in Toronto.
The U.S. central bank left interest rates unchanged and dropped a longstanding reference to possible further hikes in borrowing costs. But it gave no hint that a rate cut was imminent.
“Traders thought that with the shift in the bias towards neutral that the Fed would accompany this pivot with dovish language. But the Fed did not. If anything, the Fed added some hawkish language in the text,” said Thierry Albert Wizman, global FX and rates strategist at Macquarie in New York.
Fed Chair Jerome Powell said in a press conference that the Fed would need to see more favorable data to be sure it was time to lower rates. “We do have confidence but we want to get greater confidence” that cooling inflation data was sending “a true signal”, he said.
The was last up 0.26% on the day at 103.66. It is on track for a 2.3% gain this month, the best month since September.
Traders are now pricing in a 38% probability that the Fed will cut rates in March, down from 59% earlier on Wednesday. It has fallen from 89% a month ago.
Investors are also focused on Friday’s U.S. jobs report for January, which is expected to show that employers added 180,000 jobs during the month.
The ADP National Employment Report showed on Wednesday that private payrolls increased by 107,000 jobs last month, fewer than economists’ expectations of 145,000 jobs.
The dollar has rebounded this year as U.S. economic data shows a still resilient economy and one that has a better outlook than comparable regions including the euro zone.
The euro fell 0.4% to $1.08005 and got as low as $1.07950, the lowest since Dec. 13. It is on pace for a 2.2% loss this month, the worst month since September.
Data earlier on Wednesday showed that German inflation eased slightly more than expected in January to 3.1%, helped by a drop in energy prices.
The dollar fell 0.25% to 147.26 yen. The Japanese currency has weakened due to the wide gap between U.S. and Japanese interest rates.
The greenback is on track for a 4.5% monthly gain against the yen, the largest since February last year, as weak wage data and cooling inflation leave room for the Bank of Japan to take its time raising rates.
Bank of Japan policymakers discussed in January the likelihood of a near-term exit from negative interest rates and scenarios for phasing out the bank’s massive stimulus program, a summary of opinions at the meeting showed on Wednesday.
The summary highlights a growing view within the board that conditions were falling in place to soon pull short-term interest rates out of negative territory, which would be Japan’s first interest rate hike since 2007.
Sterling fell 0.28% to $1.26630 before the Bank of England’s policy announcement on Thursday, where rates are also set to be unchanged.
In cryptocurrencies, bitcoin fell 1.57% to $42,864.
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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