Forex
Dollar slips ahead of payrolls; sterling gains post election
Investing.com – The U.S. dollar retreated in early European trade Friday ahead of the key monthly jobs report, while sterling edged higher after the result of the U.K general election.
At 03:55 ET (07:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% lower at 104.635, near its lowest point since mid-June.
Dollar slips ahead of payrolls
The dollar traded near two-week lows as traders returned from the U.S. Independence Day holiday ahead of the release of the widely-watched monthly official jobs report, looking for more cues on when the will start cutting interest rates.
Economic data this week have tended to show a cooling U.S. economy, and this has heightened expectations the Fed will cut rates sometime soon.
Traders are pricing in a 73% chance of a cut in September, according to the CME FedWatch tool.
Economists are expecting the U.S. economy to have added 189,000 in June after a larger than forecast gain of 272,000 the previous month.
“We think the risks are skewed to a softer reading today after the big drop in the employment component of the ISM services index,” said analysts at ING, in a note.
“To see a major repricing in Federal Reserve rate expectations to the dovish side however, we may need to see payrolls slow below 150k, considering the June Fed Dot Plot and rising perceived probability of a Trump win in November work as hawkish counterweights.”
Sterling gains on electoral certainty
rose 0.2% to 1.2780, just shy of the three-week high of 1.2777 seen earlier, after the opposition Labour Party won a massive majority in the U.K. general election, ending 14 years of power for the Conservative Party.
The pound is up 1% for the week, its best weekly performance since mid-May, with the expected change in government being seen as an opportunity for some certainty, despite a difficult fiscal situation, after years of market volatility under the Conservatives.
“We believe the new chancellor can avert spending cuts thanks to small edits of the fiscal rules and minor tax tweaks. However, it will be complicated to avert a rise in taxation further down the line,” said ING.
“What matters for sterling, however, is mostly the implications for Bank of England policy. And for the moment, there are none.”
rose 0.2% to 1.0827, gaining ahead of Sunday’s second round of parliamentary elections in France, with polls suggesting the far-right National Rally is likely to fall short of a majority.
The single currency, which has been under pressure since French elections were called in June, is up around 1% this week as worries that RN could gain a majority and introduce big spending increases have receded.
“We see some upside room for the pair on the back of U.S. payrolls disappointment potential,” said ING. “While EUR/USD may move to the upper half of the 1.08/1.09 range today, we think the lingering risk of a re-widening in French bond spreads after Sunday’s second round election mean the upside remains capped.”
Yen on intervention watch
In Asia, traded 0.3% lower to 160.84, with the strengthening of the yen sparking speculation over whether the Japanese government had intervened to support the currency.
Recent weakness in the yen was spurred by growing bets that the will have limited headroom to tighten policy further, amid persistent weakness in the Japanese economy.
traded marginally higher to 7.2674, with the yuan hovering around seven-month lows.
Sentiment towards China was further dented by reports that Beijing seized a Taiwanese fish trawler, and had also deployed aircraft around the Taiwan strait.
Any escalation in tensions with Taiwan could draw more scrutiny towards China, attracting more sanctions from the West.
Forex
Euro tiptoes higher, France turmoil keeps investors on edge
By Amanda Cooper
LONDON (Reuters) -The euro rose on Tuesday, regaining some poise after political turmoil in France sent traders scrambling for hedging protection against further price swings, while the yuan hit a 13-month low on tariff risks and weakness in China’s economy.
The yen, which has gained nearly 4.5% in the last two weeks, retreated slightly against the dollar, but remained near six-week highs, as traders are growing increasingly confident that Japan may hike rates this month.
The euro, which had been the weakest G10 currency through November, began this month with a 0.7% fall on Monday and was last up 0.2% at $1.05185, as France’s government heads for collapse over a budget impasse. [EUR/GVD]
French Prime Minister Michel Barnier faces a vote of no confidence on Wednesday after fierce opposition from across the political spectrum to his budget, which contains painful tax rises and spending cuts aimed at repairing the country’s precarious finances.
Demand for hedges, as reflected by euro options volatility, has hit its highest since March 2023 this week and, with the combination of a string of weak data, political uncertainty in major euro zone economies and the seemingly unstoppable dollar, the single European currency could struggle.
“There is just so much going against the euro at the moment…the list of headwinds is just growing longer by the day,” City Index market strategist Fiona Cincotta said.
“Today, you’ve got political instability in France, obviously and even in Germany, it’s rumbling and there’s sort of a sense of unease in that you’ve got the weak economic outlook,” she said.
In the last month, the euro has lost 3% against the dollar and more than 1% against both the pound and the Swiss franc.
DOLLAR RESTING, FOR NOW
The dollar typically suffers seasonal weakness in December as companies tend to buy foreign currencies. However, traders are keeping a wary eye this year on President-elect Donald Trump’s incoming administration and supporting the greenback.
Over the weekend, Trump threatened punitive tariffs unless BRICS member countries committed to the dollar as a reserve currency.
“The remarks strengthen the view that Trump may not look to weaken the dollar during his presidential term and will instead be relying on tariffs to tackle the U.S.’s large goods trade imbalance,” Rabobank strategist Jane Foley said in a note.
“We maintain the view that euro/dollar could drop to parity around the middle of next year. The timing may coincide with the introduction of new tariffs by Trump.”
had already sold off in anticipation of more tariffs from Trump and improving U.S. manufacturing data and a dive in Chinese bond yields to record lows have pulled the currency towards 7.3 per dollar for the first time since last November. [CNY/]
China fixed the yuan’s trading band at its weakest in more than a year and traders ran with it to sell the currency at 7.2996 per dollar. It traded at 7.24 on Friday. [CNY/]
The Australian dollar was up 0.2% at $0.6488, reversing some of the previous session’s 0.7% fall. Economic data was mixed, with a bigger-than-forecast current account deficit countered by a jump in government spending that is likely to boost growth.
The yen, the only G10 currency to gain on the dollar last month, touched its strongest since late October on Monday at 149.09 to the dollar and was last at 149.69, leaving the dollar up 0.1% on the day.
Markets are pricing in a near-60% chance of a 25 basis point rate hike in Japan this month.
The overriding question for investors is what Friday’s U.S. employment data will show and how likely it makes another rate cut from the Federal Reserve this month. Right now, there is a roughly 70% chance of a cut.
Job openings figures are due later on Tuesday.
Forex
USD strength does not necessarily make dollar a buy, UBS says
Investing.com — The US dollar has surged to two-year highs following the recent US presidential election, reversing from its prior lows just two months ago.
While the current strength of the greenback appears robust and market conditions remain favorable, strategists at UBS caution that it may not present a compelling buy opportunity for investors.
The rapid rebound of the dollar has been driven by stronger US economic data compared to other regions and heightened concerns over global growth. The dollar’s trajectory was further bolstered by the re-election of Donald Trump, which reduced the likelihood of significant US rate cuts.
This, coupled with global GDP growth uncertainty, US tariff threats, and US yields staying “higher for longer,” implies that the currency’s strength may persist heading into 2025. However, “it does not necessarily make the dollar a buy,” UBS strategists led by Dominic Schnider said.
The dollar has experienced a 6% rebound in the from its September low, a move equivalent to approximately one standard deviation. Strategists highlight that much of the positive news supporting the dollar appears to have already been factored into the market. As a result, they advise against pursuing further dollar strength at this stage.
The team also points to the limited sustainability of the dollar’s current valuation, citing its “extraordinarily rich valuation in trade-weighted terms.”
“This makes the USD a sell for us on any additional spikes, in our view, rather than adding to long positions. Put differently, we see value in a contrarian bias for most currency pairs,” strategists said.
In this context, the bank advocates for contrarian strategies, favoring currencies like the and , which could benefit from diverging monetary policies. Within Europe, the British emerges as UBS’s top pick, supported by better UK growth prospects and higher yields.
Emerging market currencies also offer select opportunities. UBS identifies the South African , , and as attractive for total returns, although trade risks remain a factor for export-oriented currencies like the and .
Looking ahead, UBS foresees a 6% decline in the broad DXY over the medium term, driven by easing US yields and the diminishing benefits of Trump’s initial economic policies.
Forex
Asia FX under pressure from new US export curbs on China; yuan hits 1-yr low
Investing.com– Most Asian currencies extended declines on Tuesday with the Chinese yuan hitting a one-year low, as markets assessed the impact of new U.S. export restrictions targeting China’s semiconductor industry.
The U.S. is set to implement its third major crackdown on China’s semiconductor industry, targeting 140 entities with new export restrictions aimed at curbing China’s access to advanced chips and equipment vital for artificial intelligence and other high-tech applications.
The move, which is seen as a direct challenge to China’s technological ambitions, stirred volatility in regional currency markets, particularly for the Chinese yuan.
This comes at a time when sentiment around regional currencies had already been dampened due to U.S. President-elect Donald Trump’s recent threat to impose 100% tariffs on goods from BRICS nations (Brazil, Russia, India, China, and South Africa) if they move to undermine the U.S. dollar by creating or backing alternative currencies. Before that, he vowed to impose additional tariffs on China.
Chinese yuan hits 1-yr low on new US export curbs
The Chinese yuan fell against the dollar, with the onshore pair rising 0.3% to its highest level since mid-November 2023.
The latest export restrictions are expected to exacerbate China’s challenges in its push for technological self-sufficiency, further dampening investor sentiment towards the yuan.
Markets across the region are closely watching the U.S.-China trade situation, with fears of further restrictions or retaliatory measures adding to the volatility.
The Australian dollar, which is sensitive to the Chinese economy, weakened slightly, with the pair remaining close to four-month lows. Third-quarter Australian data is due on Wednesday.
Dollar strength creates further pressure on Asia FX
Asian currencies have also faced downward pressure from the dollar, which gained for eight consecutive weeks before falling in the last one. Expectations of a slower rate cut path due to stubborn inflation and chances of inflation remaining high with the incoming president Trump have supported the greenback.
The extended gains, inching up 0.1%, while the also ticked up 0.1%.
The South Korean won’s pair, heavily influenced by semiconductor exports, was largely unchanged. South Korean consumer inflation read softer than expected for November, keeping the prospect of more interest rate cuts by the Bank of Korea in play.
The Japanese yen’s pair rose 0.4%, and the Taiwan dollar’s pair edged 0.2% higher, while India’s was muted.
The Philippine peso’s pair was largely unchanged at 58.685 per U.S. dollar.
The Philippines revised its 2024 economic growth forecast, lowering the target to 6.0%–6.5%, down from a previous high of 7%. This adjustment comes amid ongoing domestic and global uncertainties, according to a government panel. Additionally, the peso’s expected average for 2024 has been adjusted to a range of 57.00–57.50 per dollar, from the earlier estimate of 56.00–58.00.
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