Daily Market Pulse

Dollar edges up amid hot inflation report


The U.S. dollar index edged up on Wednesday after rising 1.4% the previous session. That was the greatest one-day increase over its rivals since March 2020, and it is already heading back toward its highest levels in two decades on the back of hotter inflation data. Consumer prices in the United States unexpectedly climbed 0.1% month on month in August against the expectations of a decline by the same magnitude, fueling anticipation that the Fed may give a larger 100 basis rate hike next week. Also, the release of U.S. CPI statistics reinforced expectations that the Federal Reserve will need to act even more forcefully to battle inflation.


The Euro dropped 1.5% on Tuesday before entering a consolidation phase below parity on Wednesday morning. The common currency has retreated abruptly from its steady climb during the second week of September, as hotter-than-expected inflation in the United States prompted investors to increase their bets that the Fed will extend the period of restrictive interest rates. Meanwhile, the European Central Bank boosted interest rates by an unprecedented 75 basis points last week and stated that borrowing prices would continue to rise as inflation remains historically high. 


After plunging 1.37%, the British Pound is struggling to recover this morning and is trading around lows not seen in 37 years, weighed down by a recent dollar rise following a stronger-than-expected U.S. inflation report. At the same time, the Pound was pulled down by fears about the UK's economic outlook and political uncertainties. This week's data indicated that the inflation rate surprisingly decreased due to lower fuel costs, while the core rate surged to a new high. Furthermore, the GDP grew less than predicted in July, while the unemployment rate fell to its lowest level since 1974, but employment stalled, and more workers left the labor market. Most investors expect the Bank of England to raise interest rates by 75 basis points later this month, the highest rate increase since 1989.


Following reports that the Bank of Japan performed a rate check in possible preparation for currency intervention, the Japanese Yen rallied against the U.S. dollar, recovering from a 24-year low touched yesterday. Masoto Kanda, Japan's chief currency diplomat, recently stated that the government "would respond to currency fluctuations without ruling out any measures" as policymakers strive to protect the currency following steep losses caused by strong U.S. inflation figures. Because of a growing monetary policy difference, the Yen has lost approximately 25% of its value against the dollar this year.


The Canadian dollar fell 1.39% on Tuesday and thus lost most of the upside momentum seen earlier this week when a stronger-than-expected U.S. inflation reading triggered a dollar rally. Meanwhile, the Bank of Canada's surprisingly high August unemployment rate provided little evidence that markets anticipate a dovish pivot. Following the 75 basis point increase in September, the central bank is expected to raise interest rates again in October. In other news, Canada's 10-year government bond yield consolidated above 3.2%, the highest level in two months, as expectations of higher interest rates dampened appetite for government debt.


The Mexican Peso fell to its lowest level in more than a month, falling against the dollar after U.S. inflation advanced faster than expected in August. As a result, the Peso tracked the drop in developing market currencies as hotter-than-anticipated inflation in the United States extended the Fed's expected length of restrictive monetary policy. Domestically, the Bank of Mexico declared that it is doing all possible to keep consumer prices stable, suggesting future rate hikes after Mexican inflation reached a 21-year high in August.


The Yuan in China has stabilized after falling to a one-week low early Wednesday, as hotter-than-expected U.S. inflation has fuelled expectations for even more aggressive Federal Reserve tightening. The strong dollar is forcing the People's Bank of China (PBoC) to maintain firmer-than-expected guidance in order to limit the Yuan's weakening. The PBoC's medium-term policy loan operation on Thursday is now on the radar, with traders and analysts largely expecting the central bank to pause monetary easing. The PBoC's policy divergence from the Fed may put additional pressure on the Yuan and risk capital outflows.


The Brazilian Real plummeted over 2% yesterday against the greenback. The above-average consumer price index (CPI) of the U.S. was the main factor that underpinned Real’s drop. The data raises fears that the Fed will be forced to continue raising interest rates aggressively. Meanwhile, economists advising candidates in presidential elections agree that Brazil must seek a new pension policy but differ on the fiscal issue. Although there is consensus that the spending ceiling has lost credibility, opinions on how to reach a new tax rule are distinct. Retail sales volume likely grew 0.1% in July on a monthly basis, according to the median of estimates collected in the Bloomberg survey, after a 1.4% drop in the previous reading. The official data will be published later today.


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