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Dollar Consolidates After Strong Gains; Tapering Could Be Speeded Up

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Dollar Consolidates After Strong Gains; Tapering Could Be Speeded Up
© Reuters

By Peter Nurse

Investing.com – The dollar edged lower Thursday, consolidating after hitting 16-month highs after the minutes from the last Federal Reserve meeting pointed to the potential of a faster tapering pace.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 96.733, just below Wednesday’s high of 96.938, the strongest level since July 2020.

fell 0.1% to 115.35, not far removed from the overnight high of 115.53, a level not seen since January 2017. edged 0.2% higher to 1.33485, rose 0.2% to 1.1218 after falling below 1.12 on Wednesday  and rose 0.1% to 0.7204.

The from the Fed’s meeting held in early November, when the central bank agreed to start tapering, were released on Wednesday. These showed that a number of policymakers were open to the idea of speeding up the withdrawal of the bank’s bond-buying program if inflation remained at elevated levels. This would likely lead to the quicker introduction of higher interest rates. 

At the same time, data showed that and both rose by more than forecast, while the , widely seen as the Fed’s preferred gauge of inflation, rose at its fastest rate since April in October, and rose to multi-decade highs on an annual basis. 

San Francisco Fed President Mary Daly added to the reasons to be bullish about the dollar, saying on Wednesday that she could see a case being made to speed up asset tapering.

“We find increasing evidence of a new leg of inflationary pressures in the U.S., increasing our conviction of a hawkish shift from the Fed during 2022,” said analysts at Nordea, in a note.

There’s little in the way of news expected from the U.S. to influence the foreign exchange markets Thursday due to the Thanksgiving holiday, but the from the European Central Bank’s meeting at the end of October are due for release.

“Despite the fourth [Covid] wave in Europe, the ECB seems to be sticking to the view that the PEPP [pandemic emergency purchase program] scheme will end in March,” said analysts at ING, in a note.

Elsewhere, fell 0.3% to 12.0497, with the Turkish lira rebounding to an extent after falling to record lows earlier in the week on the back of President Tayyip Erdogan defending the central bank’s recent rate cuts. The pair climbed to a high of 13.45 on Tuesday. 

Additionally, fell 0.1% to 9.1039 ahead of a meeting by the Riksbank, with investors looking to see whether Sweden’s central bank still plans to keep its policy rate at zero into 2024. That comes after Sweden’s Prime Minister was forced to resign after her coalition partner refused to approve her budget bill.

fell 0.1% to 328.67, with the National Bank of Hungary widely expected to hike its one-week deposit rate another 10 basis points to 2.60%.

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Forex

Column-Crypto regulators may see 10% household exposure as high watermark :Mike Dolan

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© Reuters. Representations of cryptocurrency Bitcoin plunge into water in this illustration taken, May 23, 2022. REUTERS/Dado Ruvic/Illustration

By Mike Dolan

LONDON (Reuters) – Whatever the broader financial or economic stability risks of volatile crypto tokens, government watchdogs may reasonably balk at 10% household exposure to loosely-regulated speculative punts that double or halve in value every 6 months.

So far this year the leading crypto ‘currencies’ such as Bitcoin and Ether have dropped 40-50% and there’s been an earthquake in the parallel ‘stablecoin’ world of supposedly pegged tokens that act as links from regular finance to the twilight zone of crypto, or ‘decentralised’, finance.

Another typical year in the nether regions of finance? Caveat emptor, some might say.

But the latest twists touched another nerve among governments and central banks who fear they’ve let this ecosystem get out of hand without proper oversight or adequate transparency to reach levels beyond which they may find it difficult to control or shore up.

G7 finance chiefs meeting in Germany late last week cited the crypto turmoil and urged its Financial Stability Board “to advance the swift development and implementation of consistent and comprehensive regulation.”

French central bank chief Francois Villeroy de Galhau reinforced the message this week and upped the urgency at the World Economic Forum in Davos, warning of lax investment protection as well as money laundering risks.

“It’s an emergency question now… I strongly hope we will have this regulation in Europe this year,” Villeroy said.

While still relatively small compared to stocks, bonds or real estate, two surveys released this week from the U.S. Federal Reserve and European Central Bank show that at least 10% of all households in both regions have dabbled in crypto as an investment over 2021.

The Fed’s annual “Survey of Household Economics and Decisionmaking” report polled 11,000 adults late last year and painted a relative picture of rude health for consumer finances overall – conducted though it was before one of the worst starts to a year in more than 20 years.

Asking about cryptocurrency for the first time, the survey found 12% of adults used or held cryptocurrency for investment in the previous 12 months. Less than 3% had any reason to use it for payment or remittance purposes.

While this might pale against estimates of just over 50% of U.S. households holding stocks for saving or retirement, it’s likely an uncomfortably large share for governments who see these tokens as having little or no use or value longer term and who fret about financial sharks burning inexperienced savers.

And if, as some estimate, a majority of those holding the tokens arrived over the past year and are underwater at levels over $30,000 or less, then damage limitation may be the first task of watchdogs and governments.

ECB chief Christine Lagarde, for one, said this week that Bitcoin and the hundreds of other lesser-known tokens were basically ‘worth nothing’.

Graphic: Chart on crypto use from ECB household survey – https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrnkexvm/One.PNG

Graphic: Chart on crypto from Fed household survey – https://fingfx.thomsonreuters.com/gfx/mkt/egvbkwjaxpq/Two.PNG b9febc7a-0299-4725-8764-77a8af66f78e1 cd5d8873-a53f-4833-bd8c-867bdb89c9f52

WORTHLESS?

And for those who think it’s all just a bit of high-octane fun for wealthy folk who can afford to lose some marginal funds in a puff of smoke, there were other sobering details in the Fed survey. While almost half invested in crypto had annual incomes of $100,000 or more, almost a third earned less than $50,000.

The ECB’s Consumer Expectation Survey, meantime, chimed with the Fed findings and showed as many as 10% of euro zone households now own crypto tokens in one shape or form.

Much like the Fed estimate, it showed a “U-shaped” curve in the income quintiles and financial literacy of those invested – concentrated either in richer and highly educated households who could perhaps afford to lose the punt, but also in low income households with low financial literacy scores.

Middle income groups appear to have given the whole thing a bodyswerve.

The question then is whether – much like the marketing of highly speculative and volatile stock or bond funds to retail investors – regulators should finally demand overhaul of rules on marketing, celebrity-endorsed advertising or easy access to these tokens on fintech banking apps or trading portals.

And now may be the time to act while the potential macroeconomic fallout still be limited and before crypto too becomes ‘too big to fail.”

Goldman Sachs (NYSE:GS) estimates the global market for crypto dropped by about a trillion dollars to $1.3 trillion since late last year, with U.S. households exposed to one third of that hit.

Comparing that decline to overall US household net worth of $150 trillion, it saw little additional drag on the wider economy and felt the 20% drop in stocks over the same time would have far more impact.

But for Deutsche Bank (ETR:DBKGn) analyst Marion Laboure the game is up already. Curbing the speculative excesses of some of the more marginal coins will likely defeat the attraction for many people of being there at all and for those tokens that threaten to rival existing currencies, the hammer will come down harder.

“Many historical examples highlight the power of regulatory bodies to maintain financial stability,” she wrote. “Regulation is coming sooner rather than later.”

Graphic: Bitcoin, Ether vs S&P500 – https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwejnbvo/Three.PNG bada928d-b29d-4ff7-a2d9-a7dd2b9037d13

Related columns:

COLUMN-‘Mom & pop’ investors left high and dry in tech, crypto meltdown

COLUMN-Crypto warnings invoke U.S. subprime bust, 2008, and all that

(The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own.)

(by Mike Dolan, mike.dolan@thomsonreuters.com. Twitter (NYSE:TWTR): @reutersMikeD)

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Forex

Dollar Up Ahead of the Fed Minutes Release

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© Reuters

By Gina Lee

Investing.com – The dollar was up on Wednesday morning in Asia as investors awaited minutes from the last U.S. Federal Reserve meeting.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched up 0.09% to 101.968 by 1:07 PM ET (5:07 AM GMT).

The USD/JPY pair edged up 0.11% to 126.96.

The AUD/USD pair edged up 0.15% to 0.7114, the NZD/USD pair gained 0.67% to 0.6507. The Reserve Bank of New Zealand raised the interest rate from 1.5% to 2.0% as Investing.com expected. But it released more hawkish guidance on its future policy path, saying that a larger and earlier could reduce the risk of inflation becoming persistent.

The USD/CNY pair gained 0.26% to 6.6708, while the GBP/USD pair inched up 0.05% to 1.2535.

The euro declined 0.22% to $1.07105 but remained near Tuesday’s high of $1.0748, a level not seen since April 25. European Central Bank President Christine Lagarde’s comments said eurozone interest rates will likely be in positive territory by the end of the third quarter, which gave the euro support.

Lagarde’s comments implied an increase of at least 50 basis points to the deposit rate and triggered speculation of bigger hikes this summer.

U.S. 10-year Treasury yield edged up to 2.7631%, after dipping to a nearly one-month low of 2.718% overnight.

Investors are keeping an eye on the monetary policy outlook with worries of a potential recession caused by the tightening monetary policies. The minutes from the last Fed meeting will be released later today, investors are expecting more clues on whether the tightening would continue.

However, Fed Bank of Atlanta President Raphael Bostic, one of the central bank’s dovish policymakers, warned that headlong rate hikes could create “significant economic dislocation” and urged the Fed to tighten policy with care and avoid “recklessness” in an essay published on Tuesday.

“It is unclear whether we are getting closer to the Fed put, but it is clear that growth headwinds are becoming more evident,”  National Australia Bank markets economist Tapas Strickland wrote in a client note.

“The Fed of course remains focused on inflation, but if inflation reads were (to) start to moderate, then Bostic has opened up the possibility of a Fed pause.”

In the Asia-Pacific, the Bank of Korea will release its interest rate decision on Thursday.

In cryptocurrency, bitcoin consolidated around $30,000.

 

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Forex

Dollar Bulls on Ice as Bets for Fed Pause on Rate Hikes Gather Pace

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© Reuters

By Yasin Ebrahim 

Investing.com — The melt-up in dollar has come unstuck recently as the odds of the Federal Reserve putting its rate hike mission on ice later this year gather pace.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell 0.30% to 101.79

“When it comes to the US, the idea of a Fed pause in the summer is gaining a little traction,” ING said in a note.

Fed members including Chairman Jerome Powell recently laid out the red carpet for two 50 basis point rate hikes at the next two meetings that would provide the central bank with breathing room to reassess the threat of inflation becoming entrenched.

Atlanta Fed President Raphael Bostic was the latest Fed member to back the idea of a Fed ‘pause’ later this year. 

“I have got a baseline view where for me I think a pause in September might make sense,” Bostic told reporters Monday following a speech to the Rotary Club of Atlanta.

The remarks arrived on the heels of the Kansas Fed President Esther George, a former arch-hawk, who on Monday “seemed to support the view that the Fed should re-assess the situation after 50bp hikes in both June and July,” ING said in its note.

The cooling expectations for aggressive Fed rate hikes has hurt 2-year Treasury yields, which are sensitive to Fed rate hikes, forcing the dollar to put the brakes on its advance.

While stability in the US rates markets “could start to see volatility levels temporarily edge a little lower,” ING was quick to warn that a  prolonged u-turn, or correction, in the greenback was unlikely.

“We favour stability over a sharp correction lower for the broad dollar trend – largely since the Fed has the largest cause of any to be tightening rates sharply,” ING said, noting that the Fed rate hike expectations could change following the central bank’s June meeting.

“This could all change at the next FOMC meeting on 15 June if the Dot Plots were to show 3%+ rates for end-23. But that FOMC meeting is three weeks away.”

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