Daily Market Pulse

Dollar down after three-day rise


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.25% lower followed by recovering its momentum with tepid losses on Thursday morning. Yesterday, the U.S. dollar ended in negative territory after a three-day rise. This comes on the heels of the pullback of U.S. treasury yields, which made it harder for the dollar to sustain its demand. Meanwhile, traders expect the Federal Reserve to tighten more aggressively in order to contain the stubbornly rising inflation. This stabilizes the U.S. dollar and averts further declines. Additionally, China has lowered the Loan Prime Rate (LPR) on loans, which boosts market sentiment and reduces demand for safe-haven U.S. dollars. Today's intraday performance of U.S. equities suggests a minor uptick in the market mood. On the other hand, the risk rally is constrained by rising tensions between Russia and Ukraine, which keeps markets cautious. Moving forward, the weekly Initial Jobless Claims, Existing Home Sales, and Philadelphia Fed Manufacturing Survey from the U.S. calendar will be closely watched for a further impetus to the dollar.


The Euro closed 0.16% higher, snapping the three-day downtrend and finishing positive on Wednesday, although it lost its traction during Thursday early morning. The common currency rallied yesterday on the back of the weakened dollar and rising German Bund yields underpinning some demand, while the U.S. dollar slid tracking the drop in U.S. Treasury yields. The German Bund yields rose beyond positive for the first time, supported by comments from European Central Bank (ECB) policymaker Francois Villeroy de Galhau suggesting a light hawkish narrative around the ECB. The decreasing spread between German Bunds and U.S. Treasury bond yields strengthens the Euro. On the other hand, the latest bounce in Treasury yields backed by Fed’s hawkish outlook restrains potential gains for the Euro. Looking forward, traders await Eurozone Consumer Price Index data for December, expected at 5%, and ECB meeting accounts to hint stimulus cuts and rate hikes to further influence Euro prices. 


The Pound Sterling closed 0.13% higher and continues its uptrend during Thursday’s morning session. The British pound edged higher for the second consecutive day and swung around its intraday high levels backed by strong inflation data featured yesterday. Meanwhile, the Consumer Price Index (CPI) in the UK rose to 5.4% annually for December, promoting higher bets by investors on Bank of England (BoE) to deliver rate hikes. Additionally, the UK government announced yesterday to lift the Covid restrictions in the nation. This along with the weakness in the U.S. dollar provides additional support to the Sterling. Elsewhere, political pressure around the UK Prime Minister Boris Johnson keeps the markets uncertain, especially after Boris Johnson’s team was openly accused of blackmailing rebel Tory Members of Parliament. Looking forward, Market participants will see data releases from US economic docket and wider market sentiments to provide fresh impetus to Sterling. 


The Japanese Yen closed 0.24% higher yesterday, followed by a corrective pullback during Thursday morning’s session. The Japanese Yen rose moderately versus the U.S. dollar on Thursday, extending gains from the previous two days, as the Bank of Japan (BoJ) warned of rising inflationary pressures in its quarterly outlook report. The BoJ forecasted core consumer inflation at 1.1% for the fiscal year ending March 2023, up from 0.9% before, and cautioned that inflation might increase faster than predicted if raw material prices continue to rise. Meanwhile, foreign investors dumped Japanese stocks for the first time in four weeks, as global investors sold stocks on predictions that the U.S. Federal Reserve would tighten monetary policy more forcefully to confront stubbornly rising inflation. Additionally, sentiment towards Japanese stocks was also dampened amid concerns over a spike in omicron-driven Covid infections in the country.


The Loonie closed marginally lower against the dollar and regained momentum on Thursday morning. Yesterday, the Loonie was supported by solid inflation data and increasing oil prices. The headline inflation rate in Canada increased to 4.8% in December 2021, up from 4.7% in November and October, in line with market expectations. This was the highest inflation rate since September 1991. As a result, investors are betting heavily that the Bank of Canada (BoC) will increase interest rates at its upcoming monetary policy meeting. Meanwhile, robust demand and short-term supply interruptions lifted crude oil prices to their highest level since late 2014. Furthermore, despite significant floods and shipping difficulties in British Columbia throughout the month, wholesale sales in Canada increased by 3.5% monthly in November 2021, above original predictions of 2.7%. On the other hand, a rebound in US Treasury bond rates, boosted by the possibility of a Fed rate hike in March, weighs on the Loonie.


The Mexican Peso finished 0.50% lower before consolidating its losses on Thursday’s morning session against the dollar. On Wednesday, the Mexican Peso reached its lowest level since January 6th, amid increasing U.S. government yields, a comeback in the dollar, and dismal December GDP data. The yield on the benchmark U.S. 10-year Treasury note is about 1.85%, the highest since January 2020, as investors anticipate the first Fed raise in March, and bets are increasing that it will be more than 25 basis points. Domestically, early statistics revealed that the economy likely dropped 0.2% in December compared to the same month the previous year, indicating a sluggish performance in the fourth quarter of last year.


The Chinese Yuan closed 0.13% higher on Wednesday. Even after the People's Bank of China (PBoC) reduced the country's benchmark lending rates, the Yuan climbed against the dollar on Thursday, owing to robust seasonal business demand. The People's Bank of China cut the 1-year LPR (Loan Prime Rate) by 10 basis points to 3.7% and the 5-year LPR by 5 basis points to 4.6%, as Beijing increased its monetary easing measures to support a faltering economy. Meanwhile, the 10-year government bond yield in China dropped to 2.72% in January, the lowest since May 2020, after the PBoC reduced key interest rates and committed to employing additional monetary tools to boost the economy. In other news, the Shanghai Composite slid 0.09% and the Shenzhen Component dipped 0.06% on Thursday, as mainland stocks failed to capitalize on early gains as traders considered the Chinese central bank's recent policy actions.


The Brazilian Real surged 1.78% higher against the greenback on Wednesday, reaching its highest level since November 11th, after the economic activity estimates revealed that the Brazilian economy expanded by 0.7% in November, slightly above market forecasts and ending a four-month decline. The currency has been devalued by periodic lower adjustments of growth estimates, thus better-than-expected economic data has provided some relief to investors. Furthermore, currency gains were supported by news that President Jair Bolsonaro is likely to approve the 2022 budget, removing a point of uncertainty. Furthermore, increased iron ore prices are supporting an additional currency surge. Meanwhile, a protest by federal civil employees who called for a day of strike in Brasilia has prompted the market to worry that the government would cave into pressure and raise public expenditure in an election year.


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