Fears of a recession kept the U.S. dollar on a bullish path throughout yesterday, resulting in a 0.26% gain for the day. The dollar's rally came to a halt this morning as expectations for a larger 100 basis point rate hike faded. Federal Reserve Governor Christopher Waller stated that markets may have gotten ahead of themselves by pricing in a 100 basis point rate hike in July, but that a 75 basis point hike would bring them back to neutral. Meanwhile, U.S. inflation rose 9.1% year on year in June 2022, reaching its highest level since 1981 and putting pressure on the Federal Reserve to respond more aggressively. Nonetheless, the dollar was on track for its third straight weekly gain, aided by safe-haven inflows due to concerns about an economic slowdown.
The euro pair fell 0.42% but recovered some ground on Friday morning. Europe's turmoil exacerbated the common currency's weakness. The Russian energy giant, Gazprom, has stated that it cannot guarantee that the Nord Stream 1 pipeline will reopen after repairs. According to German Economy Minister Robert Habeck, the uncertainty surrounding gas deliveries "is clouding the economic outlook significantly heading into the second half of the year." Also, Italian Prime Minister Mario Draghi announced his resignation, causing political troubles in the bloc.
The pound slid 0.56% and is trading near its lowest level since March 2020. The pound was weighed down by political noise in the United Kingdom after Prime Minister announced his resignation and the Conservatives began an election campaign. The sentiment was also dampened by the implications of tighter monetary policy in the United States after a hotter-than-expected inflation reading boosted bets on the Federal Reserve raising interest rates by 100 basis points. In other news, investors continue to weigh the impact of higher interest rates on growth, as well as the race to be the next Prime Minister of the United Kingdom. Since December, the Bank of England has raised interest rates five times by 115 basis points, but traders have reduced some rate hike bets as the UK's economic outlook has deteriorated significantly due to sky-high inflation, which hurts household consumption.
The Japanese yen gained ground this morning after it tumbled 1.41% on Thursday. Japan's benchmark 10-year bond yield was just 0.25% below the implicit cap yield, as investors assessed the prospects of faster and further Fed rate hikes following a higher-than-expected 9.1% increase in U.S. inflation in June. Domestically, the Bank of Japan governor pledged to maintain the ultra-loose monetary policy, a sharp contrast to the hawkish policies of major global central banks. In other news, the Nikkei 225 Index rose 0.54%, while the broader Topix Index fell 0.03% in thin trade on Friday, with Uniqlo parent Fast Retailing providing the market with the biggest boost. Furthermore, investors continued to assess the impact of a rapidly declining yen, which has increased import costs and squeezed corporate margins while benefiting export-oriented firms.
The Canadian dollar dropped sharply yesterday before resuming its decline this morning. The Canadian dollar fell to levels not seen since October 2020, as increased recession fears drove investors to the safety of the greenback and reduced demand for Canada's heavyweight commodity exports. The dollar's strength was also aided by rising expectations that the Federal Reserve will raise rates by 100 basis points (bps) at its meeting this month, following June inflation figures that exceeded expectations. The loonie fell despite an increasingly hawkish Bank of Canada, which surprised markets with a 100 basis point rate hike this week, as the Canadian economy faces surging inflation and a record low unemployment rate.
The Mexican peso appears to be continuing its downward trend, falling 0.34% on Thursday. The risk-off market environment created by the recession and hawkish Fed is keeping the Mexican peso under pressure. Meanwhile, minutes from Banxico's most recent meeting revealed that policymakers were unanimous in raising interest rates by 75 basis points, with most members supporting aggressive rate hikes in the coming meeting to combat surging 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.
The Chinese yuan closed 0.42% lower in the previous session against the greenback. The offshore yuan fell against the dollar, approaching its lowest level in nearly two months, as weaker-than-expected Chinese economic data dampened sentiment and muddied the outlook for the rest of the year. China's economy grew 0.4% year on year in the second quarter of 2022, falling short of expectations for a 1% increase and slowing sharply from 4.8% growth in the previous quarter. The latest figures highlighted the severe disruptions caused by Covid lockdowns and increased pressure on Chinese authorities to provide additional stimulus after the central bank indicated that further interest rate cuts are unlikely.
The Brazilian currency recovered some of its losses yesterday by closing 0.90% higher against the greenback. Still, the currency remains under pressure from abroad, commodities and domestic fiscal problems. Also, risk of a stronger rise in U.S. interest rates and the impending recession keep investors away from risky assets. Meanwhile, Brent oil futures price for September it closed down at US$ 99.10. Iron ore retreated 8.4% to $100.25 per ton, according to S&P Global Commodity Insights' Platts Index, at the lowest price in more than seven months. Elsewhere, it has been weeks since Brazilian assets, including the Real, have been pressured by the disarray of public accounts. On Wednesday, the Chamber approved the Benefits PEC, which expands government spending about R$ 41 billion outside the spending ceiling. Still in relation to the domestic situation, the perception of risk in Brazil has been increasing due to this fiscal lack of control.