Forex
Dollar drops to one-month low vs euro before key CPI test
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By Kevin Buckland
TOKYO (Reuters) -The dollar dipped to a one-month low versus the euro on Wednesday amid lower Treasury yields as traders braced for a key U.S. inflation report later in the day that could dictate the path of Federal Reserve policy.
However, the yen hovered close to a two-week low as a still-gaping yield gap between local bonds and U.S. peers continued to encourage selling of the Japanese currency.
The euro edged up 0.03% to $1.0823 in Asian trading hours, and earlier rose to $1.0828 for the first time since April 10.
The – which measures the currency against six top rivals, but is heavily weighted towards the euro – eased 0.11% to 104.94, after dipping to a 1-1/2-week low of 104.92 earlier.
The benchmark long-term U.S. Treasury yield edged down to 4.4414%, extending a 3-1/2-basis point (bp) retreat overnight.
Wednesday’s report on core consumer prices is expected to show CPI rose 0.3% month-on-month in April, down from a 0.4% growth the previous month, according to a Reuters poll.
“The market is going to sink or swim together,” Deutsche Bank strategist Alan Ruskin wrote in a note, pointing out the “extremely rare” concentration of analysts’ forecasts at 0.3%.
He noted that rate path expectations are “a little more sticky than usual” and would require more than a single modest upside or downside surprise to swing markets considerably.
However, in the event of “a large upside miss” of 0.5% or more, “early thoughts of the next move possibly being a hike would create a very large scale repricing of rates and a major USD surge against all currencies,” he said.
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Fed Chair Jerome Powell gave a bullish assessment on Tuesday of where the U.S. economy stands, with an outlook for continued above-trend growth and confidence in falling inflation that, while eroded by recent data, remains largely intact.
Higher-than-expected consumer prices in the first quarter of the year were the driving force for a sharp repricing of the pace of Fed rate cuts, with those bets now pared back to about 45 bps of reductions this year.
Despite broad dollar weakness overnight against the majority of its peers, it continued to climb against the yen. The dollar edged back 0.12% to 156.245 yen on Wednesday, but had pushed as high as 156.80 overnight.
In contrast to U.S. counterparts, Japanese long-term yields stand at just 0.955%, even with Bank of Japan rhetoric turning more hawkish in recent days and prospects for another rate hike in June increasing.
The dollar’s surge to a 34-year peak of 160.245 yen on April 29 triggered two rounds of aggressive yen buying that traders and analysts suspect was the work of the BOJ and Japanese finance ministry.
“The BOJ will hope that tonight’s U.S. CPI release is in line with expectations to avoid the need for a difficult conversation tomorrow about when the appropriate time is to commence a third round of intervention – mindful that the past two rounds have yet to turn around the yen’s fortunes,” Tony Sycamore, an analyst at IG, wrote in a client note.
Elsewhere, the yuan bounced back from a two-week low versus the dollar as a report of a possible plan to ease the country’s housing glut boosted sentiment, outweighing U.S. President Joe Biden’s decision to impose steep tariff increases on an array of Chinese goods.
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The dollar dropped 0.24% to 7.2232 yuan in offshore trading, after reaching the highest since May 1 at 7.2460 overnight.
Antipodean currencies also benefitted from the China optimism, with the Australian dollar gaining 0.32% to $0.6648 after earlier reaching $0.6651 for the first time since March 8.
The New Zealand dollar climbed 0.37% to $0.6062, and earlier touched $0.6064 for the first time since April 10.
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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