Forex
Dollar falls, euro highest since August in thin holiday trading
© Reuters. FILE PHOTO: U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
By Karen Brettell
NEW YORK (Reuters) -The fell on Tuesday and the euro hit a more than four-month high as investors waited on fresh clues to when the Federal Reserve is likely to begin cutting interest rates as inflation falls closer to the U.S. central bank’s 2% annual target.
Volumes were muted the day after Christmas, however, as markets in the UK, Australia, New Zealand and Hong Kong, among others, were still out for a public holiday. Many traders globally are also out for holidays until the New Year.
The greenback is on track to post its worst performance since 2020 against a basket of currencies as anticipation of Fed rate cuts dents the appeal of the U.S. currency relative to peers.
Many analysts expect the U.S. economy to markedly slow in 2024, but the Fed is also expected to act to ensure that the gap between the fed funds rate and realized inflation doesn’t widen too far.
If inflation falls much faster than the Fed’s benchmark rate it can tighten monetary conditions more than Fed policymakers intend and increase the risk of a hard economic landing.
“Inflation should continue to cool, which will afford policymakers the ability to trim rates by June in order to prevent passive tightening in real rates,” analysts at Action Economics noted in a report on Tuesday.
However they pushed back against a cut coming as soon as March and disagreed with market pricing of 154 bps in easing by December, noting that this is “unlikely to be necessary unless the economy were to fall into a recession in coming months.”
Data on Friday showed U.S. prices fell in November for the first in more than 3-1/2 years, pushing the annual increase in inflation further below 3%.
Annual home prices in October rose again, pointing toward continued recovery of the housing market, data on Tuesday showed. Separately a Mastercard (NYSE:) report showed U.S. retail sales rose 3.1% between Nov. 1 and Dec. 24 as shoppers looked for last-minute Christmas deals amid big promotions.
The dollar index was last down 0.18% on the day at 101.44. It has fallen from a 20-year high of 114.78 on Sept. 28 2022 and is pace for a yearly loss of 1.98%.
The euro was up 0.20% at $1.1045, the highest since Aug. 10. The single currency has risen from a 20-year low of $0.9528 on Sept. 26, 2022 and is on track for a 3.08% gain this year.
The dollar gained 0.06% against the yen to 142.47. The dollar reached a 32-year high of 151.94 yen on Oct. 24, 2022, and came close to reaching this level again last month, before the Japanese currency recovered. The dollar is on pace for a 8.68% gain this year.
The yen has steadied near a recent five-month peak on the view that the Bank of Japan (BOJ) could soon mark an end to its ultra-easy policy. For most of 2022 and 2023, the policy has kept the Japanese currency under pressure as other major central banks embarked on aggressive rate-hike cycles.
BOJ Governor Kazuo Ueda said on Monday the likelihood of achieving the central bank’s inflation target was “gradually rising” and it would consider changing policy if prospects of sustainably achieving the 2% target increase “sufficiently”.
In cryptocurrencies, fell 3.36% to $42,130.
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Currency bid prices at 3:00PM (2000 GMT)
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
Previous Change
Session
Dollar index 101.4400 101.6400 -0.18% -1.981% +101.7700 +101.4500
Euro/Dollar $1.1045 $1.1015 +0.20% +3.08% +$1.1045 +$1.1010
Dollar/Yen 142.4700 142.4050 +0.06% +8.68% +142.6250 +142.0900
Euro/Yen 157.35 156.85 +0.32% +12.15% +157.3600 +156.5900
Dollar/Swiss 0.8532 0.8555 -0.27% -7.73% +0.8579 +0.8532
Sterling/Dollar $1.2722 $1.2699 +0.10% +5.16% +$1.2723 +$1.2689
Dollar/Canadian 1.3203 1.3268 -0.41% -2.56% +1.3262 +1.3202
Aussie/Dollar $0.6824 $0.6799 +0.24% +0.12% +$0.6824 +$0.6799
Euro/Swiss 0.9422 0.9423 -0.01% -4.78% +0.9448 +0.9419
Euro/Sterling 0.8679 0.8672 +0.08% -1.87% +0.8686 +0.8669
NZ $0.6331 $0.6298 +0.36% -0.29% +$0.6332 +$0.6295
Dollar/Dollar
Dollar/Norway 10.1360 10.2120 -0.57% +3.46% +10.2710 +10.1540
Euro/Norway 11.1980 11.2303 -0.29% +6.71% +11.3130 +11.2010
Dollar/Sweden 9.9919 10.0179 +0.17% -4.00% +10.0734 +9.9848
Euro/Sweden 11.0360 11.0175 +0.17% -1.02% +11.0935 +11.0100
Forex
BofA sees potential for further USD selling by CTAs
On Monday, Bank of America (BofA) provided insights into the potential actions of Commodity Trading Advisors (CTAs) in the coming week.
According to BofA, CTAs might continue to sell the U.S. dollar (USD) against most currencies following a trend that emerged after the Consumer Price Index (CPI) report led to a weakening dollar. The bank’s models indicate that USD long positions have been reduced this week.
The bank’s analysis suggests that in the foreign exchange (FX) market, CTAs are likely to persist with short covering in the euro (EUR), British pound (GBP), and Canadian dollar (CAD).
Additionally, there is an expectation for CTAs to increase their recently established long positions in the Australian dollar (AUD) and potentially initiate a long position in the Mexican peso (MXN), given the positive trend strength for the peso.
In the commodities sector, despite an increase in the price of gold last week, the trend for the precious metal declined, prompting CTAs to sell, albeit at a slower pace. BofA anticipates that this trend of selling gold and oil will continue into the next week.
The analysis also noted that CTAs’ long positions in are nearing extremely high levels, while long positions in aluminium are being unwound. In contrast, soybeans are experiencing short covering.
The bank’s report serves as a gauge of how trend-following traders might adjust their portfolios in response to market movements.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Forex
BofA sees further dollar depreciation, expects G10 FX to stay in range
On Monday, Bank of America (BofA) analysts provided insights into the current state of G10 foreign exchange (FX) markets, noting a general sentiment of disappointment among investors due to the markets’ lack of volatility.
Despite a recent reversal in the U.S. dollar (USD), major currency pairs have not moved significantly, staying within their established ranges. BofA anticipates further depreciation of the USD, yet it emphasizes that the currency’s movements are expected to remain close to year-end consensus forecasts.
The analysis highlighted that while markets have expressed a desire for more excitement in G10 FX trading, they must come to terms with the inherent trade-off between carry trade opportunities and higher volatility. Carry trades, where investors borrow in low-yielding currencies to invest in higher-yielding ones, have been identified as a dominant trend post-global financial crisis.
However, this strategy tends to reduce market volatility, leading to what BofA describes as an “uninspiring” and “stuck in the mud” trading environment.
BofA’s commentary suggests that the pursuit of carry as a passive strategy has been a factor in dampening volatility in the FX markets. The firm underscores that investors should not expect both high carry returns and high volatility, as these market conditions are typically mutually exclusive. The lack of clear fundamental trends in G10 FX has been a source of frustration for markets, but the current trend of carry is clear, even if it leads to lower volatility.
The analysts also touched upon the anticipation around the next batch of U.S. data, which many investors hope might shift the narrative. However, BofA indicates that such expectations may be overly optimistic. The firm’s message to the markets is to adjust expectations and accept the current dynamics, with the USD continuing to play a central role in the G10 FX space.
In summary, BofA’s analysis points to a continuation of the recent patterns in G10 FX markets, with a slight downward trend in the USD value but within the bounds of recent trading ranges.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Forex
Narrow dollar range likely to remain for now – Goldman
Investing.com – The U.S. dollar is trading in a calm fashion against the majors of late, and these narrow ranges will likely stay for a while longer, according to Goldman Sachs, with divergence having to wait.
AT 05:20 ET (09:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded unchanged at 104.330, steadying after losing around 1% last week in the wake of soft U.S. inflation data.
“We think there is only limited room for the market to press Dollar shorts on the back of the inflation news,” said analysts at Goldman Sachs, in a note dated May 17.
“After all, while the prints were mostly in line with expectations, they were not in line with the target. As a result, the news does not change the policy outlook much beyond reinforcing the recent rhetoric.”
The subsequent market response has been reminiscent of the post-March FOMC FX reaction, when the response to ‘dovish dots’ stalled not because of fresh data, but instead because FX is still a relative game, and the Dollar fundamentals have not shifted much, the investment bank added.
And, this time around, we think the rally in front end rates looks more consistent with cyclical concerns rather than dovish expectations.
“That matters for FX because there is a narrow path for the Dollar to depreciate on a broad basis when growth is softening,” the bank added. “This is especially true in the current environment when faster Fed cuts would likely be met with easier policy abroad as well.”
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