Daily Market Pulse

Dollar rally halts amid an improved market mood

7 minute read


After having registered its highest close in nearly two decades, the U.S. dollar index gained 0.81% yesterday before edging lower early Friday amid an improving market mood, nevertheless, it still remains on track for the longest streak of weekly gains since 2018.  Meanwhile, producer prices in the United States rose 0.5% in April 2022, less than the upwardly revised 1.6% gain in March and basically in line with market forecasts. In addition, Fed Chairman Jerome Powell reiterated that the policy rate will be raised by 50 basis points at each of the next two policy meetings in order to tamp down the rising inflation. Reflecting the positive shift witnessed in risk sentiment, U.S. stock index futures are up between 0.65% and 1.25% in the early European morning. In addition, the benchmark 10-year U.S. Treasury bond yield fell for the fourth straight day on Thursday and remains on track to snap a five-week rising streak. Moving ahead, market participants will see Export Price Index and Import Price Index figures from the U.S. economic docket for fresh impetus.


The Euro plunged 1.27% yesterday amid broad dollar strength, although, it revived its momentum this morning amid an upbeat risk appetite in the market. The common currency fell to a new 5-year low in mid-May, triggered by a general dollar rally, after a hotter-than-expected U.S. inflation data reinforced hopes that the Fed will tighten quicker than other major central banks to manage rising inflation. In addition, the Euro has been under tremendous pressure since February due to Russia's invasion of Ukraine, the energy crisis, rising inflation, and fears of an economic slowdown, while the European Central Bank (ECB) is expected to tighten monetary policy considerably more slowly than the Fed. Investors currently expect the ECB to raise rates by 25 basis points in both July and September, followed by another increase by the end of the year.


The Pound sterling declined 0.40% yesterday while it remains steady on Friday morning against the greenback. The Pound fell further, exceeding a new two-year low, in the middle of the month. Investors are now concerned about the risk of a recession despite rising inflation. Meanwhile, the British economy grew at a slower-than-expected 0.8% in Q1 and lost 0.1% in March alone, while the Bank of England (BoE) forecasts the economy to stagnate in Q2 and shrink in Q4. Simultaneously, traders increasingly believe the Fed would raise borrowing prices quicker than other central banks in order to contain skyrocketing inflation, although the BoE is perceived as having less capacity for tightening amid economic growth concerns. Elsewhere, the FTSE 100 is expected to open higher on Friday, following a 1.6% drop in the previous session and reflecting a global market bounce. The Fed Chair's remarks allayed fears of steeper interest-rate hikes.


The Japanese Yen cooled down this morning after it surged 1.25% in the previous session against the U.S. dollar. The Japanese Yen is set end a nine-week losing streak as U.S. Treasury yields retreated on expectations that inflation has peaked and the global economy is weakening. Meanwhile, the Bank of Japan (BOJ) increased its enormous stimulus program and reaffirmed its commitment to its ultra-low yield policy in April, stating it will offer to buy an unlimited quantity of 10-year government bonds every market day to preserve an implicit 0.25% yield cap around its zero objectives. This contrasted sharply with the Federal Reserve, which has aggressively raised interest rates to battle inflation. In other news, the Nikkei 225 Index rose 2.64% on Friday, while the wider Topix Index rose 1.91% as investors bought up beaten-down shares, with technology firms leading the market bounce.


The Loonie closed down 0.42% lower yesterday against its U.S. counterpart before recovering its momentum this morning amid the positive market mood. In a recent speech, Bank of Canada Deputy Governor Gravelle stated that borrowing costs must swiftly rise to more normal levels in order to return inflation to target and that the present policy interest rate of 1% is "too stimulative." He also iterated that interest rates should be raised higher into the neutral zone of 2 to 3% in order to reduce domestic inflation and restore the economy to balance. Having said that, it may enhance market expectations of a second jumbo rate hike at the bank's next meeting on June 1, following a 50-basis-point increase in April. Investors now expect Canada's benchmark interest rate to rise over 3% during the next year, in one of the most aggressive tightening cycles since the turn of the century. 


The Mexican Peso closed by posting 0.33% gains in the previous session and continued to nudge higher supported by (Mexico's Central Bank) Banxico's rate hike and the positive market sentiment on Friday morning. In the latest news, Mexico's central bank raised borrowing prices by half a percentage point in a widely anticipated move to curb two-decade-high inflation, adding that it may consider speeding up future hikes. Also, Banxico hiked the benchmark rate to 7%, as predicted by 23 of 24 analysts polled by Bloomberg. The hike mirrored the Federal Reserve's, which Mexican policymakers have traditionally followed to avoid sudden capital outflows.


The Chinese Yuan closed 0.77% lower against the greenback in the previous session. In the latest news, as credit demand deteriorated owing to Covid lockdowns in numerous cities, including the economic powerhouse of Shanghai, Chinese banks issued CNY 645.4 billion in new Yuan loans in April 2022, the lowest since December of 2017 and much below market estimates of CNY 1515 billion. Furthermore, the broad M2 money supply increased by 10.5% in April, exceeding predictions of 9.9% and 9.7%in March. In addition, the People's Bank of China (PBOC) recently decreased the reserve requirement ratio for banks by a smaller-than-expected amount last month and refrained from decreasing policy interest rates. In other news, the Shanghai Composite gained 0.96% and the Shenzhen Component gained 0.59% on Friday, extending recent gains as investors assessed the likelihood of a policy rate cut next week in response to several pledges to assist the economy.


The Brazillian Real gained 0.77% in the previous session against the greenback.  At the latest, due to Brazil's vital role in the mining industry, its exports continue to fluctuate due to sector fundamentals. As a result, the Brazilian currency remains sensitive to the fundamentals of the sector. Copper retreated below $9,000/t for the first time since Oct/21, with concerns of weaker demand amid new Covid cases in Shanghai and faster-than-expected inflation in the U.S., which reinforces expectations of monetary tightening. Similarly, iron ore also fell with signs that Covid remains in the Shanghai community feeding concerns about the prospects for demand for the steel ingredient in China, while local media suggest that one of the biggest real estate companies in the country has deferred/denied its obligations. Elsewhere, in neighboring countries, Peru raised its basic interest rate by half a percentage point to 5%, the highest in 13 years. The Central Bank of Mexico also raised by 50 bps to 7% as expected and indicated it might pick up the pace. The Central Bank of Argentina raised rates by 200 bps to 49% after inflation picked up to 58% in April. 


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