Daily Market Pulse

Dollar advances towards multi-decade high

6 minute read


Following Wednesday's volatile trading where the greenback retreated 0.21%, the U.S. dollar index gained bullish momentum early Thursday and began to climb toward multi-decade highs. Safe-haven flows and hawkish Fed bets fuel the dollar's rally in the second half of the week. Meanwhile, the U.S. Bureau of Labor Statistics reported yesterday that annual inflation in the U.S., as measured by the Consumer Price Index (CPI), increased to 9.1% in June from 8.6% in May. As a result, there is now a 75% chance that the Fed will raise its policy rate by 175 basis points over the next two meetings. Moving forward, investors will deviate from investor data to focus on weekly jobless claims and the Producer Price Index.


The euro advanced in the second half of the day and closed 0.21% higher on Wednesday, but it retraced a large portion of its daily gain as the common currency turned south and began to edge lower toward all-important parity. The Euro has already been under pressure in recent months as an uncertain Russian energy supply weighs on GDP growth, making it more difficult for the European Central Bank to tighten monetary policy. In addition, as the energy crisis continues to hammer Europe's economy, Brussels is set to raise its inflation forecasts for this year and next, while lowering its growth forecast. Inflation is expected to fall to 4% in 2023. That is still significantly higher than the European Central Bank's target and much higher than previously predicted.


Following a flat close yesterday, the Pound sterling failed to gain traction and fell early Thursday, with the dollar's valuation continuing to influence the British currency. In recent news, new economic data showed that the UK economy expanded by 0.5% in May, far exceeding expectations, while industrial output unexpectedly increased by 1.4% year on year. The data increased expectations that the Bank of England will move to more aggressive rate hikes in the coming meetings to bring inflation down from 40-year highs. In other news, Rishi Sunak, the ex-chancellor of the exchequer, and a frontrunner in the Conservative party leadership race defended his "measured" economic approach in contrast to the other candidates who have promised broad tax cuts.


The Japanese Yen fell 0.38% yesterday and continued its downward trend today. As a result, the yen fell to its lowest level against the dollar in 24 years on Thursday, as expectations of a widening interest rate differential between Japan and the U.S. weighed on its value. The currency has fallen to new lows in recent weeks as traders seek higher interest rates in the United States, where the Federal Reserve is expected to act aggressively this year to combat soaring inflation. On Wednesday, consumer price index data showed that U.S. inflation hit 9.1% in June, potentially opening the door for the Federal Reserve to raise benchmark rates by a full percentage point this month. Meanwhile, the Bank of Japan has maintained an ultra-easy monetary policy, warning only against "excessive fluctuations" in the yen's value.


The Canadian dollar retreated slightly this morning after rising 0.37% against the greenback following the Bank of Canada's rate hike decision. As a result, the Loonie recovered from a 19-month low reached earlier in the month. The Bank of Canada raised its overnight rate target by an entire percentage point to 2.5%, surprising analysts who expected a 75bps hike while signaling that it will raise interest rates further in the coming meeting to combat rising inflation. Previously, the Bank of Canada survey revealed that consumers' inflation expectations reached a new high in the near term and were significantly higher in the long run. At the same time, the most recent labor data showed a record low unemployment rate, while voluntary labor market exits minimized Canada's unexpected job losses.


The Mexican peso loses some of its gains from the previous session where it rose 0.60% against the U.S. dollar. In doing so, the peso recovered from a four-month low touched this week, tracking a dollar pullback to lead a broad recovery for Latin American currencies. According to the minutes of Banxico's most recent meeting, policymakers were unanimous in raising interest rates by 75 basis points, and most members support aggressive rate hikes in the coming meeting to combat rising inflation. Mexico's June CPI data showed an inflation rate of 8%, the highest since 2001. Nonetheless, global concerns about an economic slowdown continue to put pressure on riskier currencies and drive investors to safer assets. At the same time, Moody's downgraded Mexico's sovereign debt rating, citing poor economic trends as a threat to the country's credit profile.


The Chinese yuan closed 0.14% higher in the previous session against the greenback. On Thursday, the yuan fell against the U.S. dollar to its lowest level in nearly a month, as another strong U.S. inflation reading fueled expectations for even more aggressive Fed tightening, lifting the dollar while putting pressure on other major currencies. The yuan was also under pressure from resurgent Covid-19 outbreaks, which raised concerns about tighter lockdowns and wider economic disruption in China. To limit the downside, China's central bank stated that it is closely monitoring accelerated global tightening and sees ample domestic liquidity, implying that further interest rate cuts are unlikely. Investors are now anticipating China's second-quarter GDP and activity figures.


Yesterday, the Brazilian Real recovered some of its losses and gained 0.59% against the U.S. dollar. In another unexpected advance, U.S. inflation in the 12-month period reached 9.1%. The result announced on Wednesday (13), represents the highest price increase for American consumers in more than 40 years. For Brazil, the data is also quite negative, there is a risk of capital outflows as investors flock to U.S. Treasury bonds, which are regarded as the world's safest assets. The measures implemented by the Jair Bolsonaro administration to control fuel prices revived investor skepticism that the country takes fiscal policy seriously.


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