Daily Market Pulse

Dollar reaches June 2020 levels amid higher yields


The US dollar index, which measures the greenback's performance against a basket of six major currencies, recorded slight losses today 0.2 percent, after touching a 16-month top the previous day, the highest since June 2020. The greenback is tracking the performance of the US treasury yields to reflect yesterday's rally, sponsored by the upbeat NY Empire state index and Biden’s infrastructure bill. The recent knee jerk in the greenback is owing to a retreat in the US treasury yield which declined by 2.4 bps to 1.59 percent followed by the best level in two weeks on Monday. Economists predict the retreat in yields is attributable to encouraging headlines of meetings between the US President and his Chinese counterpart Xi Jinping. Investors are keeping an eye on the US retail sales index, among spikes in the Empire index and inflation forecasts, which are predicted to show a 0.7 percent MoM gain to keep the optimistic trend on track. Against a slight greenback backdrop, the S&P index climbed with mild gains following the renewed hope of the US retail sales index.


The euro fell to a new 16-month low before gaining 0.6 percent against its American counterpart in the early hours of Tuesday, following four successive pullbacks on Tuesday. The steep selloff on the first day of the week is being attributed to the dollar's recovery of strength and the European Central Bank's dovish statements. The currency's upward movement was aided by rising US yields and hopeful inflation fears sparked by comments from ECB President Lagarde, who not only delayed rate hikes until 2022 but also cited the detrimental impacts of tightening monetary policy. Investors are awaiting the release of the third quarter Gross Domestic Product statistics, which is scheduled for today and is expected to announce 3.7% annualized growth. Additionally, the growing number of Covid-19 cases in Eurozone countries is weighing on the currency and dampening the market sentiment in the old continent.


Today, the Sterling gained some ground against the dollar, aided by a variety of factors. The currency has been significantly bolstered by the announcement of strong unemployment data, which showed that the rate fell to 4.3 percent in September, below the expectation of 4.4 percent. The combination of strong employment data and Bank of England governor Andrew Bailey's overnight statements on rate hikes in December, and further boosted the pound sterling on Tuesday morning. Against the Sterling euphoria, the impending possibility of Brexit difficulties, amid fears of triggering Article 16, as well as underlying optimistic views on the dollars by the Federal Reserve's rate hike expectations, hold a cap on the pound's upside movement. Market players' attention remained focused on Brexit headlines, which will have a significant impact on sentiments towards the sterling.


The Japanese Yen eases off a two-week high, trading near the 114.15 level. The USDJPY pair built on yesterday's upward rise from the 113.75 regions and gained traction early in Tuesday's trading session. While the currency has increased in value, investors have been unable to profit from the change for a variety of reasons, at least for the time being. A cautious mentality, exacerbated by a lower tone in the equity markets, acted as a headwind for the USD/JPY pair. Although the dollar's strong positive mood prolonged support, receding US treasury bonds yields limited gains. Market participants are looking for short-term trading opportunities in the pair based on wider market emotions derived from US monthly retail sales data and US bond yields.


The Loonie advanced 0.23% against the dollar during the course of yesterday’s trading session amid U.S. treasury yields and comments from the Governor of the Bank of Canada Tiff Macklem. The spokesman said that while a substantial monetary stimulus is still needed for the economy to fully recover, the central bank is getting closer to raising interest rates. The governor highlighted that for the policy interest rate, the committee's forward guidance has been clear that it will not raise rates until economic slack is absorbed, and the economy is getting closer. The hawkish comments from the governor were offset by bolstering U.S. treasury yields which limited losses for the greenback through the course of the session. The West Texas Intermediate remains in consolidation mode, remaining stable at around USD 81 per barrel. 


The Mexican Peso sustained pressure from the U.S. dollar, arising from the bolstering of U.S. treasury yields underpinning the demand for the greenback which pushed the Mexican currency 0.56% lower. Moreover, Mexican authorities released their latest job creation reports revealing that in October 2021, the country registered a total of 20.7 million jobs, exceeding the jobs observed in pre-pandemic times. The encouraging results showed that it’s the first time the country created over 170k new jobs in two consecutive months which capped the losses for the Mexican currency through the course of the trading session. 


The Chinese Yuan briefly broke the year-to-date highs against the dollar, appreciating 0.27% during the early hours of the trading session and retracing back to the opening where it currently stands. The Yuan neared three-year highs amid Xi Jinping and Joe Biden’s summit which bolstered market sentiment and the demand for the Chinese Renmimbi. The leaders of the world’s two largest economies spoke of the need for cooperation, although both parties avoided rusty subjects such as geopolitics and trade tariffs. 


The Brazilian market remained closed during yesterday's trading session amid the National Holiday of Proclamation of the Republic. In general, the Brazilian currency has gained some ground (+4%) since the start of the month, despite the dollar gaining strength in the international market. Part of this recovery is due to the progress that the federal government has made with the approval of the Pec of the Precatorios in the House. With the domestic market reopening on Tuesday, we can expect the BRL to respond quickly in joining its emerging market peers, which retreated on Monday against the greenback. 


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