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Dollar gains on risk sentiment, Swiss franc falls on surprise rate cut

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Dollar gains on risk sentiment, Swiss franc falls on surprise rate cut
© Reuters. FILE PHOTO: Woman holds U.S. dollar banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

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By Herbert Lash and Joice Alves

NEW YORK/LONDON (Reuters) -The dollar rose on Thursday after the Swiss National Bank’s surprise interest rate cut bolstered global risk sentiment and underscored the appeal of the greenback amid strong U.S. economic growth.

Sterling slid after the Bank of England (BoE) kept its benchmark interest rate on hold as expected. But after the Federal Reserve projected a less restrictive policy stance than expected on Wednesday, risk assets worldwide soared, as did the outlook for investment flows to the U.S.

The SNB’s loosening of monetary policy suggests inflation is under control and other central banks will soon make their policies more accommodative, which has boosted the dollar, said Karl Schamotta, chief market strategist at Corpay in Toronto.

“The U.S. does remain the only game in town in global markets offering higher yields, in nominal and real terms, than any of the other major economic blocks,” he said.

“The flow of currency into the United States remains essentially unstoppable at this point given the optimism around where the U.S. economy is headed.”

The , a measure of the U.S. currency against six major trading partners, rose 0.75%. The euro fell 0.51% to $1.0862.

Fed Chair Jerome Powell said on Wednesday recent high inflation readings had not changed the overall story of slowly easing U.S. price pressures.

Fed policymakers now expect the U.S. economy to grow 2.1% in 2024, above what’s considered its long-run potential and a substantial upgrade from the 1.4% growth seen in December.

“The big question from here for the dollar will be does the pace of inflation that we saw in January and February sustain or does it start to slow down?” said Brian Daingerfield, head of G10 FX strategy at NatWest Markets in Stamford, Connecticut.

“There wasn’t any clear step in the dovish direction like you could argue was shown from the Bank of England today and was obviously delivered by the Swiss National Bank,” he said.

The differential in U.S. interest rates and those of other major economies also helped the dollar. The yield on benchmark rose 0.4 basis points to 4.273%.

The BoE’s interest rate setters voted 8-1 to keep borrowing costs at a 16-year high of 5.25% as two officials who had previously called for higher rates changed their stance.

Governor Andrew Bailey said there had been “further encouraging signs that inflation is coming down” but he also said the BoE needed more certainty that price pressures in the economy were fully under control.

Sterling was last 0.99% lower at $1.266.

The BoE’s decision came a day after data showed inflation fell to its lowest level in almost two-and-a-half years – even if it remains higher than the bank wants.

The Swiss franc fell sharply against the dollar and sank to its weakest point since July 2023 against the euro, after the SNB unexpectedly cut rates.

The euro climbed against the Swiss franc to 0.979, on track to its biggest single day since March 2023. It was last up 0.70% to 0.9753.

The dollar rose 1.26% against the Swiss franc to 0.8981 as the Swiss currency hit its lowest since November.

The SNB cut its main interest rate by 25 basis points to 1.50%, making it the first major central bank to dial back tighter monetary policy aimed at tackling inflation.

The rate cut was the Swiss central bank’s first in nine years. A majority of analysts polled by Reuters had expected the SNB to keep rates on hold.

The yen steadied against a strengthening dollar as it drew some support from expectations of further rate hikes from the Bank of Japan later this year and some jaw-boning efforts from Japanese government officials.

The dollar was last 0.28% higher against the yen at 151.655, after the Japanese currency rallied in Asian trading and reversed some of its heavy losses in the wake of this week’s BOJ policy shift.

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Dollar flat ahead of key inflation release; Middle East tensions ease

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Investing.com – The U.S. dollar traded largely unchanged in calm trading Monday, amid a calming of tensions in the Middle East and ahead of the release of the Federal Reserve’s favorite gauge of inflation later in the week.

At 05:40 ET (09:40 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded flat at 106.005, retreating from the five-month peak of 106.51 seen last week. 

Dollar stable ahead of key inflation release

The dollar surged to new highs last week after Israel launched a missile attack on Iran, in an escalation of the conflict in the volatile Middle East.

However, tensions appear to have been cooled, with Tehran downplaying Israel’s retaliatory drone strike against Iran, in what appeared to be a move aimed at averting a regional war.

“Sentiment is generally supported across asset classes as the week starts,” said analysts at ING, in a note. “All interested parties appear to have chosen the path of downplaying the size and consequences of Friday’s Israeli strikes in Iran.”

That said, the dollar has also been supported by strong U.S. economic data and persistent inflation, coupled with a slew of hawkish comments from Fed officials, reducing the chances of the Federal Reserve cutting rates any time soon. 

These officials will be keeping quiet this week, ahead of next week’s , but activity is likely to be limited ahead of Friday’s look at the , the Federal Reserve’s favored inflation gauge, which economists expect to remain elevated in March.

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Other economic data for the week includes an initial estimate of first quarter , which is expected to have moderated slightly from the previous quarter. Data on and will also be released along with revised figures on consumer sentiment and inflation expectations.

Euro edges up, but ECB set to cut early

In Europe, rose 0.1% to 1.0656, trading near six-month lows with regional economic weakness set to result in the European Central Bank cutting interest rates before the Federal Reserve.

Elevated tensions in the Middle East are unlikely to drive up energy prices and should not affect the European Central Bank’s plans to start cutting interest rates in June, French central bank chief Francois Villeroy de Galhau said on Sunday.

“Barring surprises, there is no need to wait much longer”, Villeroy told business daily Les Echos in an interview. “At the moment, the conflict is not leading to a marked rise in oil prices. If this were ever the case, we would have to analyse monetary policy for whether this shock is temporary and limited, or whether it is transmitted – beyond commodities – to underlying inflation.”

climbed 0.1% lower to 1.2355, just above its lowest level since mid-November seen on Friday, after Bank of England Governor Andrew Bailey and Deputy Governor Dave Ramsden alluded last week to Britain’s inflation slowing as expected. 

“Sterling markets moved on Friday after the Bank of England’s deputy governor, Dave Ramsden, sounded less concerned about price pressures and suggested that there were indications of UK inflation converging to that of the eurozone,” ING said. “Crucially, he added that the Bank will be “responsive” as evidence on inflation accumulates.”

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Yen weak ahead of BOJ meeting

In Asia, traded 0.1% higher at 154.74, remaining well above the 154 level and near 34-year highs, keeping investors on guard over any potential government intervention. 

Focus this week is on a Bank of Japan rate decision on Friday – the central bank’s first meeting after a historic rate hike in March. Any cues on future rate hikes and policy changes will be closely watched.

edged 0.1% higher to 7.2437, after the People’s Bank of China kept its benchmark on hold, as expected. 

The LPR was kept at record lows, as the PBOC moved to keep monetary policy as loose as possible to buoy economic growth. However, low interest rates are also expected to keep the yuan under pressure. 

The USDCNY pair was close to a five-month high, above the psychologically important 7.2 level. 

 

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UBS raises USDCNY forecast amid geopolitical tensions

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On Monday, UBS revised its forecast for the exchange rate, citing increasing geopolitical tensions and expectations of fewer rate cuts by the Federal Reserve. The Swiss financial services firm now anticipates the USD/CNY rate to reach 7.35 by June, up from the previous target of 7.20. Similarly, the September target has been adjusted to 7.30 from 7.15, the December target to 7.25 from 7.15, and the March 2025 target to 7.20 from 7.15.

UBS suggests that the People’s Bank of China (PBoC) is showing a greater willingness to allow a weaker yuan, which could contribute to additional short-term pressure on the Chinese currency. The firm’s analysis points to the rising geopolitical tensions as a key factor influencing the yuan’s trajectory.

Despite the potential for a pivot by the Federal Reserve in September, which might typically ease the upward trend of the USD/CNY, UBS believes that the impact could be mitigated. The firm notes that market concerns about US-China trade tensions, especially in the lead-up to the US presidential election in November, could dampen the effects of any policy changes by the Fed.

UBS’s revised targets reflect a cautious outlook on the Chinese yuan, as the global financial market continues to weigh various geopolitical and economic factors. The firm’s adjustment of the USD/CNY targets highlights the complex interplay between central bank policies, international relations, and market sentiment.

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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Asia FX weak as rate fears keep dollar steady

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Investing.com– Most Asian currencies moved in a flat-to-low range on Monday, and were nursing steep losses from the past week as concerns over higher-for-longer interest rates kept traders largely biased towards the dollar.

Still, easing fears over a bigger conflict in the Middle East offered regional currencies some relief, as risk appetite improved. 

But most regional units still retained a bulk of their losses from over the past week, as traders steadily priced out expectations that the Federal Reserve will cut interest rates by as soon as June.

Dollar steady, more rate cues awaited this week 

The and both fell slightly in Asian trade on Monday, but remained close to over five-month highs hit earlier in April. 

Waning bets on a June rate cut boosted the dollar, especially after strong U.S. inflation readings and hawkish commentary from top Fed officials. 

Focus this week is on more cues on U.S. monetary policy, specifically from data- which is the Fed’s preferred inflation gauge. The reading is due on Friday and is expected to reiterate that U.S. inflation remained sticky in March.

More cues on the U.S. economy are also due this week, with data for April set to offer more insight into business activity.

Chinese yuan steady after PBOC holds loan prime rate 

The Chinese yuan’s pair moved little on Monday after the People’s Bank of China kept its benchmark on hold, as expected. 

The LPR was kept at record lows, as the PBOC moved to keep monetary policy as loose as possible to buoy economic growth. The central bank is also expected to further trim the rate this year, after a cut to the in February. 

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But low interest rates are also expected to keep the yuan under pressure. The USDCNY pair was close to a five-month high, above the psychologically important 7.2 level. 

Japanese yen flat, BOJ meeting awaited 

The Japanese yen’s pair moved little on Monday, but remained well above the 154 level amid little relief from the dollar.

This kept investors on guard over any potential government intervention, especially as the USDJPY pair tested 34-year highs at 155. 

Focus this week is on a on Friday- the central bank’s first meeting after a historic rate hike in March. Any cues on future rate hikes and policy changes will be closely watched.

Broader Asian currencies moved little as fears of higher-for-longer U.S. rates remained in play. 

The Australian dollar’s pair rose 0.3% after tumbling to a five-month low last week.

The South Korean won’s pair rose 0.5%, while the Singapore dollar’s pair was flat.

The Indian rupee’s pair rose 0.1%, but was trading below record highs hit last week.

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