Daily Market Pulse

Dollar slips from 20 years high

7 minute read


The U.S. dollar lost slightly against its rivals on Monday, closing 0.38% lower and marking the second straight day of trading in negative territory. The U.S. dollar index is under pressure early Tuesday amid improving market sentiment and a recent drop in U.S. Treasury yields, spurred by investors seeking the safety of treasuries, underpinned by concerns that aggressive near-term hikes intended to contain soaring inflation could tip the country into recession. Meanwhile, data released on Monday indicated that manufacturing activity in New York state fell unexpectedly in May for the second time in three months. In other news, U.S. stock index futures are up 0.35% to 0.75%, confirming the improved market sentiment. Moving forward, market participants will be eagerly watching Retail Sales and Industrial Production statistics for April, as well as Fed Chairman Powell's speech.


The common currency benefited from the dollar's slide and gained 0.26% on Monday and continued to rise in the European morning. In the latest data releases, the European Commission reduced the bloc's growth forecast to 2.7% this year, down from 4.0% in February, and upped its inflation forecast to 6.1% this year and 2.7% in 2023, both considerably above the European Central Bank's (ECB) target of 2.0%. In addition, higher-than-expected U.S. inflation fueled expectations that the Fed will tighten quicker than other major central banks. Investors presently expect the ECB to raise rates by 25 basis points in both July and September, with another increase at the end of the year, whereas the Fed has already raised rates twice by a total of 75 basis points. In other news, European stocks climbed Tuesday as risk appetite returned to markets roiled by fears about global economic growth, rising prices, and policy tightening. Coming up, investors will see GDP data for Q1 and a speech by ECB president Lagarde for fresh impetus. 


The Pound sterling gained 0.24% yesterday amid the improved market mood and continued to nudge higher this morning following the release of labor market data. Having said that, the U.K. unemployment rate fell to levels not seen since 1974, while real wage growth slowed, implying another squeeze on U.K. living standards. Also, preliminary estimates show that labor productivity in the U.K. fell by 0.7% quarter on quarter in the first three months of 2022, following a 1.3% growth in the previous period. However, it is still 1.9% higher than it was before the coronavirus outbreak. This improvement above the pre-coronavirus pandemic peak does not appear to be considerably different from that forecast using the 2009 to 2019 trend, implying that no fundamental change in productive behavior as a result of the coronavirus pandemic is yet visible in these data. In other news, the FTSE 100 is set to open slightly higher on Tuesday, extending Monday's gains, though volatility is expected to remain strong as the war in Ukraine continues and concerns about the economy, China's slowdown, inflationary pressures, and monetary tightening linger.


The Japanese Yen closed 0.04% down in the previous session against the greenback and extends its downtrend on Tuesday. In the latest news, the yield on the benchmark Japan 10-year JGB has been on the rise since March to settle at around 0.25%, close to levels not seen since 2016, and staying at the upper limit of the Bank of Japan’s (BOJ targets. Furthermore, Japanese yields are followed by a global surge in borrowing costs, reflecting fears about slowing growth and expectations that central banks around the world, particularly the Fed, will hike rates quicker to combat increasing inflationary pressures. In contrast, the Bank of Japan restated its ultra-easy monetary policy this month, pledging to keep the yields near zero by purchasing an unlimited amount of government bonds required on a daily basis. As a result, the Yen is at 20-year lows, and the yield disparity between Japan and the U.S. bonds is expanding.


The Loonie capitalized on positive market sentiment and advanced 0.60% yesterday before extending its gains on Tuesday morning. Oil prices, which have risen to $114 per barrel, are also boosting the Loonie. According to the most recent data, manufacturing sales in Canada increased by 2.5% from the previous month to CAD 70.2 billion in March 2022, retreating after an upwardly revised 5.1% increase the previous month but exceeding the prior forecast of 1.7%. Manufacturing sales increased for the sixth month in a row, with rises in 16 of the 21 industries. Moreover, In March 2022, wholesale sales in Canada increased by 0.3% month on month to C$ 79.8 billion, compared to a preliminary forecast of a 0.3% dip and a revised 0.4% decline in February. In other news, the S&P/TSX Composite Index in the stock market closed 0.53% higher on Monday, extending gains for the second straight session, as gains in commodity-linked stocks offset losses in cyclical and technology stocks. Moving forward, investors await Consumer Price Index due tomorrow to see the fresh impetus. 


In absence of major economic data releases for the week, the Mexican Peso is looking up to the mercy of the U.S. dollar's valuation. Having said that, the Peso advanced 0.39% in the previous session followed by edging higher this morning. Domestically, Mexico will eliminate import customs for a year on a variety of home commodities, the majority of which are groceries, in an effort to reduce inflation pressure, the government announced in its official gazette on Monday. Corn oil, rice, chicken, beef, carrots, and many more were among the items on the government list. The government said the waiver on household essentials would go into effect on Tuesday and last a year. Moreover, the cattle waiver would go into effect pending approval from Mexico's international trade commission. 


The Chinese Yuan closed 0.09% lower in the previous session. As prospects for an end to Shanghai's severe Covid lockdown countered disappointing Chinese economic statistics for April, the Yuan gained against the U.S. dollar, surging further from 20-month lows. Shanghai has announced intentions to gradually reopen after being closed for more than six weeks, with authorities stating that "normal life" will resume on June 1. Investors also welcomed further government support vows, with China's state planner stating that it will enhance support for manufacturers, the service sector, and small businesses after retail and factory activity dropped substantially in April owing to Covid lockdowns. In the equities market, the Shanghai Composite rose 0.65%, while the Shenzhen Component rose 1.23% on Tuesday, as Shanghai achieved three consecutive days with no new Covid-19 cases outside quarantine zones, which could signal the start of restrictions being lifted.


Despite starting the week with gains (+0.35%), the Brazilian currency is not immune to the dismal data coming from China. The BRL's bullish move this Monday is attributed to the U.S. dollar's weakening abroad and the rally in commodity prices. Also, as highlighted in yesterday's comments, China's latest macro data confirmed the deterioration in economic activity in the country, with a greater-than-expected drop in retail sales, production industrial, consumer spending, as well as rising unemployment. These important fundamentals impose an additional risk to the Brazilian economy. However, the announcement at the beginning of the week that some of the main Chinese cities started a plan to ease restrictions against Covid-19 brought a positive mood to the commodities market and helped boost the BRL. Elsewhere, the latest comments from the Bank's monetary policy director, Bruno Serra, also add a bullish tone to the currency. The monetary authority reinforced that it prefers to keep interest rates stable for more time since there is a degree of difficulty in projecting inflation.


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