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Dollar’s smile makes Wall Street frown: McGeever

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Dollar's smile makes Wall Street frown: McGeever
© Reuters. FILE PHOTO: Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking/File Photo

By Jamie McGeever

ORLANDO, Florida (Reuters) -The ‘dollar smile’ can be a blessing for Wall Street, or a curse.

Right now, with the dollar’s boom being driven by a destabilizing surge in U.S. bond yields, heightened uncertainty over global growth and rapidly deteriorating investor sentiment, it is definitely the latter.

The gist of the ‘dollar smile’ theory, floated by currency analyst and now hedge fund manager Stephen Jen 20 years ago, is this: the dollar typically appreciates in good times (booming investor confidence and roaring markets) and bad (times of great financial stress and ‘risk off’ markets), but sags in between.

U.S. economic outperformance in a solid global expansion attracting strong investment inflows into U.S. assets, and Treasury yields higher than their international peers is a recipe for strong dollar and buoyant Wall Street.

The circumstances that have fostered the dollar’s rapid rise since July could not be more different.

The Chinese, European and many emerging economies are creaking, fears are growing that aggressive Fed policy will ‘break’ something at home, and the explosion in real yields has left Wall Street – especially growth and tech stocks – shrouded in a mushroom cloud of worry and uncertainty.

In terms of the ‘dollar smile’, these are ‘bad’ times. There is a growing sense in markets that the negative relationship between U.S. stocks, the dollar, and yields could persist for months.

“I expect it to remain negative for the foreseeable future, that is the next three to six months,” reckons Stuart Kaiser, head of U.S. equity trading strategy at Citi. “This is a risk-off environment.”

Kaiser reckons returns have fallen by around 7.5% over the last two months. The dollar has accounted for 3.3 percentage points of that and the 10-year real yield 2.1 pp, easily the two biggest contributors, he estimates.

The dollar is up around 7% since mid-July and is on course to register its 11th consecutive weekly gain. That would be a record winning streak since the era of free-floating currencies began over 50 years ago.

It has had bouts of stronger appreciation, such as the early 1980s and 2014-15, but never a more consistent move higher. And with U.S. bond yields the highest in years and still outpacing their global peers, it may not be over yet.


A stronger dollar and rising bond yields, especially inflation-adjusted ‘real yields,’ in a “risk off” investment climate can scare the horses on Wall Street, potentially feeding a self-fulfilling spiral of selling and de-risking.

There’s no suggestion equities are about to crash. But the speed and extent of the move in the dollar and Treasuries, and tightening of financial conditions, warrant vigilance.

According to Goldman Sachs, U.S. financial conditions are the tightest this year. This is not dissimilar to other major economies and regions, some of which – the euro zone, China and emerging markets – are feeling an even tighter squeeze.

The bank’s U.S. financial conditions index (FCI) has risen 95 basis points since mid-July and the breakdown highlights how the dollar, yields and equities are feeding off each other.

Compare that with the 100 bps rise in the global FCI or 145 bps jump in the emerging market FCI from their lows on July 25, which have been driven almost entirely by higher short and long rates. The FX impact, positive or negative, has been negligible.

As Rabobank’s Jane Foley notes, the dollar’s historical inverse correlation with emerging market stocks – a decent barometer of risk appetite – is “reasonably” strong.

“This suggests that the dollar is set to find support on safe-haven demand even as the U.S. economy slows,” Foley wrote on Thursday.

If these dynamics intensify and momentum builds up a head of steam, the dollar’s strong exchange rate could also start to erode the dollar value of U.S. firms’ overseas income, potentially having a material impact on corporate earnings.

It might be too early for that to appear in third-quarter results – many big Wall Street firms will have hedged their currency exposure over the near term – but if sustained, fourth-quarter profits could be affected.

There might be less cause for concern in corporate America, especially the growth-sensitive and tech sectors that led the rally in the first half of the year, if the dollar’s surge was happening in a relatively stable fixed-income environment.

But nominal and inflation-adjusted long-term bond yields have rocketed, threatening future cash flows and profits. Another reason for investors to be cautious.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by Andrea Ricci)


Asia FX muted with nonfarm payrolls in sight; Yen scales 4-mth peak

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Asia FX muted with nonfarm payrolls in sight; Yen scales 4-mth peak
© Reuters. – Most Asian currencies moved little on Friday as traders positioned for a potentially softer U.S. nonfarm payrolls reading, while the yen sat near a four-month high to the dollar tracking hawkish signals from the Bank of Japan. 

The was the best-performing Asian currency this week, up over 2% after BOJ Governor Kazuo Ueda signaled that the central bank was considering an eventual move away from negative interest rates. 

The yen rose 0.2% to 143.88 against the dollar on Friday. 

Ueda’s comments, made during an address on Thursday, sparked a sharp reversal in bets for more weakness in the yen, while reinforcing expectations that the BOJ will end its negative rate regime in 2024.

This helped the yen strengthen past data showing that Japan’s in the third quarter. Ueda also noted that policy will remain loose in the near-term to keep supporting the Japanese economy. 

Dollar weakens as markets bet on softer nonfarm payrolls 

Broader Asian currencies were muted, while the dollar reversed a recent rebound following a string of soft labor market readings this week.

The and steadied in the mid-103s in Asian trade, after falling sharply on Thursday.

and readings suggested that the U.S. labor market was cooling, potentially setting the scene for a softer reading for November, which is due later in the day. 

Any signs of a cooling labor market give the Federal Reserve less impetus to keep interest rates higher for longer. Friday’s reading also comes just days before the for the year, where the central bank is expected to keep rates on hold.

But markets were still seeking more cues on when the Fed could begin cutting rates in 2024. Expectations that had boosted Asian currencies in recent sessions. 

Most regional units moved little in anticipation of the payrolls reading. The fell 0.1%, and was set for mild weekly losses amid persistent concerns over an economic slowdown in China. Dollar selling by Chinese state banks helped limit losses in the yuan this week. 

The was flat after the kept rates on hold as widely expected, and said that monetary policy will remain restrictive to curb persistent risks from inflation. 

The rose 0.2%, but was set to lose 0.8% this week following a string of weak economic readings. A slowdown in China, Australia’s biggest export market, appeared to be spilling over into the country. 

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Dollar at 2-week high, euro softer as market bets on rate cuts

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Dollar at 2-week high, euro softer as market bets on rate cuts
© Reuters. U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Hannah Lang

WASHINGTON (Reuters) -The U.S. dollar was at a two-week high on Wednesday, while the euro was weak across the board as markets ramped up bets that the European Central Bank (ECB) will cut interest rates as early as March.

Although markets are still pricing at least 125 basis points of interest rate cuts from the U.S. Federal Reserve next year, the dollar was able to hold steady as rate cut bets for other central banks intensified.

The , which measures the currency against six other majors, was last up 0.19% at 104.16. The euro was down 0.29% to $1.0764.

Traders are betting that there is 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. Influential ECB policymaker Isabel Schnabel on Tuesday told Reuters that further interest rate hikes could be taken off the table given a “remarkable” fall in inflation.

The euro 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.

“It’s a reasonably sized sell-off and the market is trying to digest, is it just a correction? Did the market get over-exuberant in the previous weeks? I think there is definitely an element of that,” said Amo Sahota, director at FX consulting firm Klarity FX in San Francisco.


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 Fed and Bank of England are also likely to hold rates steady next Wednesday and Thursday respectively.

The Bank of Canada on Wednesday held its key overnight rate at 5% and, in contrast to its peers, left the door open to another hike, saying it was still concerned about inflation.

Traders have priced around a 60% chance of the U.S. central bank cutting rates in March, according to CME’s FedWatch tool.

“Markets have aggressively priced in rate cuts, without any kind of confirmation from central banks,” said Adam Button, chief currency analyst at ForexLive in Toronto. “As December continues, we need either a change in tune from central bankers or a repricing in markets.”

If the Fed were to cut rates as markets expect, it could result in the dollar loosening its grip on other G10 currencies next year, dimming the outlook for the greenback, according to a Reuters poll of foreign exchange strategists.

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 was flat at $7.1728 per dollar, a day after Moody’s cut China’s credit outlook to “negative”.

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 weakened 0.15% versus the greenback at 147.38 per dollar. The Australian dollar fell 0.02% to $0.65495.

In cryptocurrencies, bitcoin eased 0.06% to $44,049, still near its highest since April 2022.

The world’s largest cryptocurrency has gained 150% this year, fueled in part by optimism that a U.S. regulator will soon approve exchange-traded spot bitcoin funds (ETFs).

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Canadian dollar forecasts turn less bullish as BoC rate cuts eyed: Reuters poll

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Canadian dollar forecasts turn less bullish as BoC rate cuts eyed: Reuters poll
© Reuters. FILE PHOTO: A Canadian dollar coin, commonly known as the “Loonie”, is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch/File Photo

By Fergal Smith

TORONTO (Reuters) – Analysts see less upside for the Canadian dollar than previously thought over the coming year as recent data showing a slowdown in the domestic economy brings forward the expected start of Bank of Canada interest rate cuts, a Reuters poll found.

The median forecast of 35 foreign exchange analysts surveyed in the Dec. 1-5 poll was for the Canadian dollar to strengthen 0.4% to 1.3533 per U.S. dollar, or 73.89 U.S. cents, in three months, compared with 1.3450 in a November poll.

It was then expected to advance to 1.3130 in a year, versus 1.3000 in last month’s forecast.

“Our view is the Canadian dollar is going to face a difficult next three months as the data starts to look like the Canadian economy is teetering on the edge of recession if not in a mild recession,” said Simon Harvey, head of FX analysis for Monex Europe and Monex Canada.

The Canadian economy unexpectedly contracted at an annualized rate of 1.1% in the third quarter, avoiding a recession after an upward revision to the previous quarter but showing growth stumbling.

Soft domestic data “should bring forward expectations of BoC easing, especially relative to the Federal Reserve,” Harvey said. “Earlier Bank of Canada easing is going to widen rate differentials in favor of USD-CAD.”

Money markets expect the Canadian central bank to leave its benchmark interest rate on hold at a 22-year high of 5% at a policy announcement on Wednesday and then begin easing policy as soon as March. As recently as October, there were no rate cuts priced in for 2024.

A separate Reuters poll, from last week, showed economists expect the BoC to start cutting rates in the second quarter of next year and borrowing costs will drop by at least one percentage point by the end of next year.

The Canadian 2-year yield has fallen further below its U.S. equivalent in recent weeks to a gap of 54 basis points, which is the widest since March.

A lower yield tends to make a currency less attractive to investors.

(For other stories from the December Reuters foreign exchange poll:)

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