Forex
Dollar edges lower in holiday trade; sterling gains as polling starts
Investing.com – The U.S. dollar slipped lower in early European trade Thursday as weak economic data raised expectations of interest rate cuts by the Federal Reserve, while sterling edged higher as the U.K. went to the polls.
At 04:20 ET (08:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 104.900, extending steep overnight declines.
Economic weakness hits dollar
The dollar retreated slightly Thursday, continuing Wednesday’s weakness, after the release of data showing softer-than-expected employment figures and a weak reading on non-manufacturing activity.
This data has increased expectations that a cooling U.S. economy will persuade Fed officials to sanction interest rate cuts in the near future.
The tool showed traders pricing in a nearly 66% chance of a September rate cut, up from 59% seen a day ago.
“We suspect some of that reluctance to price in more easing is related to rising chances of Donald Trump winning the U.S. presidency in November. The assumption here is that Trump’s protectionist and tax-cut policies can slow Fed easing,” said analysts at ING, in a note.
Trading is likely to be range bound Thursday, given the U.S. is celebrating Independence Day, and a lot of attention will turn to Friday’s report for further guidance.
French political uncertainty
rose 0.1% to 1.0794, with the euro benefiting from the dollar weakness, although the single currency may struggle to hold onto its gains amid regional political uncertainty.
The should not rush into its next interest rate cut, Slovenia’s central bank governor Bostjan Vasle said on Wednesday, as a host of risks could still derail eurozone disinflation.
“The message that European Central Bank officials sent from [a ECB forum in] Sintra was one of patience. There is clearly no pressure to move with back-to-back rate cuts given slower disinflation, and it seems that the preference is also for a wait-and-see approach over verbal intervention when it comes to the recent bond market turmoil,” said ING.
The euro has fallen more than 1% since French President Emmanuel Macron called for a surprise snap election on June 9, and it’s difficult to see it gaining substantially given the uncertainty ahead of Sunday’s run-off election.
“We remain somewhat doubtful that markets will be comfortable with EUR/USD trading close to 1.09 given lingering uncertainty about French politics and the rising risk of a Trump re-election,” ING added.
rose 0.2% to 1.2759, with the U.K. going to the polls Thursday in a general election.
The opposition Labour Party is widely expected to end 14 years of power for the Conservative Party, with the latest polls giving Labour an approximate 20-point lead.
“We have struggled to identify major risks for the pound heading into today’s vote. Not only because opinion polls have firmly suggested Labour should secure a majority, but also because it seems unlikely that the change in government will influence the policy path for the Bank of England,” ING said.
The U.K.’s tight finances mean any new government will have little room to drastically increase public spending.
Yen on intervention watch
In Asia, traded 0.3% lower to 161.21, after nearly crossing the 162 level on Wednesday.
The pair was still trading well above 160- the level that had last attracted government intervention in May. With Japanese officials reiterating their commitment to defend the yen, traders remained on guard over any potential intervention in the coming days.
Traders speculated that the government would take advantage of low trading volumes during the July 4 U.S. market holiday to intervene. The government’s intervention in May had taken place during a Japanese market holiday.
largely unchanged at 7.2701, remaining close to seven-month highs amid waning confidence in the Chinese economy.
Investing.com – The US dollar has gained strongly since the US presidential election in November, but these gains are unlikely to limit the hit that US customers are likely to face from tariffs, according to UBS.
At 08:25 ET (13:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 108.950, but was around 1.5% higher over the last month, and remained not far from the more than two-year high seen last week.
The theory is that a stronger dollar lowers US import prices, said analysts at UBS, in a note dated Jan. 17. Those lower prices would partially offset the tax payments US consumers must make to the US Treasury when buying imports.
If the US paid for the Chinese imports, then a stronger dollar would automatically reduce the amount of dollars paid (fewer dollars are exchanged to pay the renminbi price). However, the US pays for practically all its imports in dollars, so this does not happen.
If the dollar strengthens, the dollar price is unchanged, unless the exporter consciously chooses to lower the dollar price of the goods sold, UBS added.
An exporter to the US might deliberately lower dollar prices, as (in dollar terms) local currency costs are lower. But local currency costs are only a fraction of a manufacturer’s costs.
“A Chinese electronics manufacturer, importing chips (bought in dollars) and exporting computers to the US (in dollars), will probably keep their dollar prices stable—ignoring currency moves,” UBS added.
The US dollar strengthened against China’s renminbi in 2016 and 2018/19, and US import price inflation for products from China showed no noticeable break with earlier trends.
The preference seems to have been to reroute supply chains as a way of avoiding trade taxes.
Investing.com – The US dollar slumped Monday following a report that indicated that President-elect Donald Trump was set to delay imposing trade tariffs immediately upon his inauguration, an expectation which had boosted the US currency following his November election victory.
At 09:20 ET (14:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 1.1% lower to 108.020, having climbed to a more than two-year high last week.
The Wall Street Journal reported Monday that Trump is planning to issue a broad memorandum on his inauguration that directs federal agencies to study trade policies and evaluate US trade relationships with China and America’s continental neighbors—but stops short of imposing new tariffs on his first day in office.
The memo, which the WSJ has seen, suggests that debates are still ongoing within the incoming administration over how to deliver on Trump’s campaign trail promises for hefty tariffs on imports from trade rivals such as China.
The dollar has gained around 4% since the November presidential election as traders anticipated Trump’s policies will be inflationary, necessitating higher interest rates for a longer period.
“Financial markets are on tenterhooks to see what executive orders newly elected US President Donald Trump will enact on his first day,” said analysts at ING, in a note.
“FX markets are most interested in what he has to say about tariffs and what kind of pain the Oval Office plans to inflict on major trade partners.”
Bank of America (BofA) noted a significant increase in repo rates during the week of January 13 due to heightened liquidity demand triggered by tax payments and limited funding provided by the People’s Bank of China (PBoC).
The liquidity squeeze was most noticeable on January 16, the day following the tax payment deadline, with DR007 and R007 reaching 2.34% and 4.19%, respectively.
The PBoC maintained its stance on defending the exchange rate stability, resulting in the tightness of (RMB) liquidity being felt in the offshore market as well.
On January 9, the central bank announced it would issue RMB60 billion of 6-month bills in Hong Kong, a significant increase compared to previous issuances. The coupon rate of 3.4% was notably higher than the December issuance, reflecting the tightness of CNH liquidity and subdued demand from investors.
The December FX settlement balance by banks’ clients fell further to a deficit of US$10.5 billion, the first deficit reading since July 2024. A key change from the previous month was a sharp increase in USD demand for service trade. Reports also suggest that domestic importers have been actively purchasing USD via FX forward to hedge against tariffs risk in recent weeks, which has been exerting upward pressure on forward points.
On January 13, the PBoC increased the cross-border macroprudential parameter to 1.75 from 1.50. This move allows domestic corporations and Financial Institutions (FIs) to conduct more cross-border borrowing.
Given the widened interest rate gap between China and overseas, BofA believes this is more of a symbolic move by the PBoC to anchor market’s expectation on FX.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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