Daily Market Pulse

Dollar remains close to twenty-year high


The U.S. dollar index eased on Tuesday, giving back some of its recent gains after closing flat on Monday, but it is still close to a 20-year high reached last week as expectations that the Federal Reserve will continue to aggressively tighten monetary policy supported the currency. Last week, the Fed raised its key interest rate by 75 basis points, the largest increase since 1994. In the most recent commentary, Fed Governor Christopher Waller stated on Saturday that if economic data came in as expected, he would support another hike of a similar magnitude at the central bank's July meeting. Following the long weekend, the market mood improves in the European morning, with U.S. stock index futures rising more than 1%. Investors are now anticipating Fed Chair Jerome Powell's appearance before Congress on Wednesday and Thursday for clues on the likely course of U.S. monetary policy.


The common currency gathered bullish momentum by closing 0.27% higher yesterday and continued advancing moderately this morning. While testifying before the European Parliament, European Central Bank President Christine Lagarde said that a recession in the eurozone was not their baseline scenario and reiterated that they intend to raise key rates by 25 basis points (bps) in July. Elsewhere, later this week, the European Union's 27 member states will formally grant Ukraine candidate status as a means of moral support for Ukraine in its fight against Russian aggression. In addition to this, a 9 billion euro financial aid package for Ukraine is expected to be finalized in the coming days by the EU.


Following Catherine Mann's comments, a policymaker at the Bank of England, on Monday that a rate increase of 50 basis points could reduce the risk that a weaker pound would boost domestic inflation. The Pound Sterling regained its footing to close Monday's session with a 0.15% gain, before extending its upward momentum on Tuesday. In separately to this, the start of the biggest rail strike in 30 years is being closely watched by investors in the United Kingdom, as late talks on a pay dispute failed. Over 40,000 members of the RMT union are expected to walk out after being offered a 3% pay rise while inflation is nearing 10%, along with pension cuts and demands for longer working hours. In other news, after Monday's 1.5% gain, the FTSE 100 gained 0.5% on Tuesday, bolstered by gains in miners and oil stocks.


The Japanese Yen gained a sliver of a percentage point against the U.S. dollar on Tuesday, but it has since lost some of that momentum this morning. Japan's Prime Minister Fumio Kishida has stated that the ultra-loose monetary policy of the country "should not be touched for now," expressing support for the Bank of Japan despite an increasing policy gap with other central banks around the world. While other major central banks, including the U.S. Federal Reserve, have begun raising interest rates to curb inflation, the Bank of Japan has pledged to keep yields on government bonds at zero. As a result, the yen has fallen to historic lows against the dollar because of the widening gap in interest rates. Kenta Izumi, who heads the main opposition Constitutional Democratic Party of Japan, slammed the government and the BoJ for not taking any robust action against rising prices and the weaker yen.


This morning, the Canadian dollar continued its upward trend, post-closing 0.38% higher against the U.S. dollar in the previous session. Weakness in the U.S. dollar and expectations of a Bank of Canada aggressive monetary tightening before the release of domestic CPI data-fueled strength for the Loonie. Also, May's stronger than expected labor market data bolsters market expectations of a 75 bps rate-hike in the July 14th meeting following June's 50 bps increase, as domestic inflation continues to run at a 31-year high of 6.8%. On top of that, Tiff Macklem, the governor of the Bank of Canada (BoC), has stated that he is committed to achieving the 2.0% target for domestic inflation. They also promised to reduce the central bank's balance sheet and hinted at further rate increases if inflation worsened. Later in the session, Statistics Canada will report that Retail Sales in Canada, which is expected to rose by 0.8% in April after having stayed unchanged in March.


Peso climbed 0.42% on Monday and is continuing to rise this morning. The U.S. dollar's decline and the improved market momentum that favors risky assets are the driving forces behind the move. Meanwhile, Deputy Governor Jonathan Heath of the Bank of Mexico is reported to have said that the central bank is likely to raise its benchmark interest rate by 75 basis points on Thursday. With inflation at its highest level in more than two decades, the Mexican central bank expects a return to target in the first quarter of 2024. The Bank of Mexico raised its overnight interest-rate target by 50 basis points to 7% for its eighth consecutive hike in the mid-May meeting and said it could consider more forceful measures if necessary to bring inflation back to its 3% target.


The Chinese yuan gained 0.24% against the U.S. dollar on Monday. Against the U.S. dollar, China's yuan rose on Tuesday, boosted by signs of economic recovery and foreign inflows into Chinese stocks as Beijing unveiled a slew of stimulus measures and eased regulations on the tech sector. The yuan's strength was also bolstered by a possible reduction in some U.S. tariffs on Chinese goods, though some analysts cautioned that China's position as a safe haven from the turmoil in global markets could be short-lived. Following a drop in April when investors dumped yuan-denominated assets due to concerns over the impact of Covid lockdowns and the fallout from the Russia-Ukraine crisis, the currency has stabilized over the past month. In other news, Shanghai's Composite Index dropped 0.26%, while China's Shenzhen Component Index fell 0.51% on Tuesday, consolidating recent gains following a strong rally that saw mainland shares outperform their global peers in the last two months.


The Brazilian Real plunged 0.82% following the resignation of the president of Petrobras, Jose Mauro Coelho, which brought a wave of disturbance to the Brazilian currency. Coelho resigned after strong pressure from president Bolsonaro amid an increase in diesel and gasoline prices last Friday. The market understands that the government is willing to do anything to guarantee Bolsonaro's re-election, which would bring an even greater imbalance to the economy and distortion in the political realm. Coming up, today we will have the publication of the minutes of the last meeting of the Copom, although, unlikely it would bring anything fresh insights. Elsewhere, the Real may remain under pressure as oil prices and ores continue to decline (steel retreated 7% yesterday) in futures markets due to negative prospects for the growth of the Chinese economy.


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