Forex
US dollar rises, in consolidation mode, ahead of inflation data
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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 Gertrude Chavez-Dreyfuss and Herbert Lash
NEW YORK (Reuters) -The dollar rose modestly against major currencies on Monday, as investors braced for data on U.S. inflation and retail sales this week for clues on when the Federal Reserve may begin widely anticipated interest rate cuts.
In cryptocurrencies, bitcoin hit $50,000 for the first time since December 2021, boosted by inflows into exchange traded funds backed by the digital asset. It was last up 5.6% at $50,207.
The , a measure of the greenback against six of its peers, was up 0.1% at 104.12, as the market expects the consumer price index (CPI) for January – due to be released on Tuesday – to give the Fed further confidence that inflation is slowing towards its 2% target.
Wall Street economists expect the year-on-year CPI to rise 2.9%, down from 3.4% in the previous month, according to a Reuters poll. The core CPI is also expected to have slowed its growth on a year-on-year basis in January to 3.7%, from 3.9% in the prior period.
“Psychologically, dropping down into the 2s (in the CPI year-on-year) even though it is 2.9% for the headline CPI number would be a good boost for market sentiment,” said Amo Sahota, executive director at FX consulting firm Klarity FX in San Francisco.
“We’re in a holding pattern here. There seems to be no directional trades. It’s really like: Let’s just take a breath before tomorrow’s (CPI) data, before we make the next push in either direction.”
Ahead of the CPI report on Tuesday, the Federal Reserve Bank of New York released on Monday its January Survey of Consumer Expectations, which showed inflation a year and five years from now were unchanged at readings of 3% and 2.5%, respectively, while the projected rise in inflation three years from now dropped to 2.4%, the lowest since March 2020, from December’s 2.6%.
“The market is in a reasonably good mood going into Tuesday, hoping that we’re going to get a similar outcome,” said Klarity FX’s Sahota.
Retail sales for January are due out on Thursday, with economists expecting a 0.1% decline for January, from a 0.6% rise in December, a Reuters poll showed.
The euro slipped 0.1% against the dollar to $1.0771, falling from a 10-day high touched in early trading. A reading of the euro zone’s economic growth in the fourth quarter on Wednesday could provide fresh direction.
“While it won’t necessarily impact CPI dramatically this month, the most recent round of PMI (purchasing managers index) surveys showed prices increasing for 58.5% of respondents across the two surveys, suggesting inflation could well tick up as we move into spring,” Matthew Weller, global head of research, FOREX.com and City Index, wrote in a research note.
“This is no doubt a concern for the Fed, and may lead to a smaller-than-expected reaction even if this week’s (lagging) CPI reading comes in below expectations,” Weller added.
Changing expectations of when and how quickly central banks will cut interest rates as inflation falls are a significant driver of currency markets at present.
Strong jobs data this month has largely taken a Fed rate cut in March off the table, with markets seeing a move in May as somewhat more likely.
Elsewhere, there is plenty of data due this week in Britain, including inflation and gross domestic product (GDP) numbers with the former, on Wednesday, similarly likely to influence opinion on when the Bank of England will start to cut interest rates. It is currently seen lagging the Fed and ECB.
Sterling was last trading at $1.2628, little changed on the day.
Markets are also keeping an eye on the highly rate-sensitive yen, which strengthened sharply late last year as markets priced in early U.S. rate cuts, but has since weakened as that timing got pushed back.
Japanese authorities intervened in late 2022 to prop up the yen, which weakened to as much as 151.94 per dollar. The dollar was last flat against the yen at 149.31.
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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