Forex
Dollar edges higher on Trump ascendancy; ECB meeting looms
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Investing.com – The U.S. dollar edged higher in early European trade Tuesday, climbing away from one-month lows as traders digested the increased chance of former President Donald Trump returning to the White House as well as the likelihood that the Federal Reserve will start cutting interest rates in September.
At 05:20 ET (09:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 103.952, after falling to the lowest levels since mid-July earlier in the week.
Dollar looks to Trump for strength
The dollar edged higher after Donald Trump received a rapturous welcome on the first day of the Republican National Convention in Milwaukee, just a few days after surviving an assassination attempt in Pennsylvania on Saturday.
The four-day convention will culminate with Trump’s prime-time address on Thursday, when he formally accepts the party’s nomination to face President Joe Biden in a rematch of their 2020 race.
The attack has bolstered expectations of a Trump victory in the November election – a scenario that could boost the dollar, given he has signaled his intent to enact more protectionist trade policies.
“A stronger dollar appears to be driven by rising bets on a Trump presidency following last weekend’s events,” said analysts at ING, in a note. “If markets continue to grow their Trump bets, there are higher chances of wide pre-emptive positioning in the months into November.”
That said, the greenback still trades just above its lowest level in a month after comments from Federal Reserve Chair signaled the likelihood of a September rate cut.
On Monday, Powell said the second quarter’s three U.S. inflation readings “add somewhat to confidence” that the pace of price increases is returning to the Federal Reserve’s target in a sustainable way.
The comments, likely Powell’s last until his press conference after a Fed meeting set for late July, shifted rate cut expectations.
ECB meeting looms large
rose 0.1% to 1.0899, with the euro just below its highest level for four months, ahead of Thursday’s policy-setting meeting.
The ECB is widely expected to maintain its current rates after they eased in June, and thus attention will be on comments from head in the accompanying press conference.
traded marginally lower at 1.2963, having last week climbed to its highest levels seen in over two years.
The political certainty following the landslide election victory for Britain’s center-left Labour government has helped sterling gain friends, particularly when contrasting the turmoil in both France and the U.S..
Yen unwinds recent gains
In Asia, traded 0.3% higher to 158.47, with the yen weakening, unwinding more of a recent recovery against the dollar.
The yen’s recent gains had increased speculation over whether the Japanese government had intervened in currency markets to support the yen.
Japanese officials reiterated their warnings on intervention on Tuesday, stating that they were ready to take all possible measures to stem excessive volatility in currency markets.
traded 0.1% higher to 7.2661, with the yuan close to an eight-month low, battered by data showing the Chinese economy grew less than expected in the second quarter.
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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