Forex
Dollar touches 2-week high, euro soft as traders bet on Q1 rate cuts
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© Reuters. U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
By Samuel Indyk and Ankur Banerjee
LONDON (Reuters) -The U.S. dollar touched a two-week high on Wednesday, while the euro was weak across the board as markets ramped up bets that the European Central Bank will cut interest rates as early as March.
The euro was down 0.2% against the dollar at a three-week low of $1.0773, as markets adjust rate expectations lower following soft data and dovish central bank commentary.
The single currency also touched a three-month low against the pound, a five-week low versus the yen and a 6-1/2 week low against the Swiss franc.
“The story in currency markets is mostly about a softer euro,” said Niels Christensen, chief analyst at Nordea.
“Yesterday’s comments from ECB’s Schnabel supported the market view of early rate cuts.”
Influential policymaker Isabel Schnabel on Tuesday told Reuters that further interest rate hikes could be taken off the table given a “remarkable” fall in inflation.
Markets are now placing around an 85% chance that the ECB cuts interest rates at the March meeting, with almost 150 basis points worth of cuts priced by the end of next year.
The ECB will set interest rates on Thursday next week and is all but certain to leave them at the current record high of 4%. The Federal Reserve and Bank of England are also likely to hold rates steady next Wednesday and Thursday respectively.
Fed officials are now in a blackout period ahead of the Dec. 12-13 meeting, where a key focus will be the updated projections of where they see rates in 2024.
Traders have priced around a 60% chance of the U.S. central bank cutting rates in March, according to CME’s FedWatch tool. They have also priced in at least 125 basis points of cuts next year.
Investors have been reassessing the extent of U.S. rate cuts next year in the past few days, helping lift the dollar.
“Markets have gone a bit overboard with pricing in very aggressive path of rate cuts through next year,” said Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon (NYSE:) Investment Management.
Mitra said there could be a snapback should the Fed drive home the message more forcefully that it is not about to cut rates anytime soon.
“Our view is that Fed might hold off till the second quarter and even then the cuts would be a lot more shallower than what the market would like,” Mitra said.
The widely expected rate cuts from the Fed will result in the dollar loosening its grip on other G10 currencies next year, dimming the outlook for the greenback, according to Reuters poll of foreign exchange strategists.
The , which measures the currency against six other majors, was up 0.1% at 104.07, having touched a two-week high of 104.10 earlier.
The spotlight in Asia was on China, as markets grappled with rating agency Moody’s (NYSE:) cut to the Asian giant’s credit outlook.
The offshore rose 0.1% to $7.1694 per dollar, a day after Moody’s cut China’s credit outlook to “negative”.
The spot yuan rate opened at 7.1570 per dollar and was last changing hands at 7.1585.
China’s major state-owned banks stepped up U.S. dollar selling forcefully after the Moody’s statement on Tuesday, and they continued to sell the greenback on Wednesday morning, Reuters reported.
Elsewhere in Asia, the Japanese yen was down 0.1% at 147.29 per dollar. The Australian dollar rose 0.3% to $0.6574, while the New Zealand dollar rose 0.4% to $0.6154.
In cryptocurrencies, bitcoin eased 0.3% to $43,940 having surged above $44,000 earlier in the session.
The world’s largest cryptocurrency has gained 150% this year, fuelled in part by optimism that a U.S. regulator will soon approve exchange-traded spot bitcoin funds (ETFs).
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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