Daily Market Pulse

Dollar pullbacks from near 20-year high

5 minute read


The U.S. dollar index eased and pulled back from near 20-year highs this morning after clocking a 0.09% gain on Wednesday, as the risk-on mood restored to the markets. Investors are avoiding big bets ahead of Federal Reserve Chair Jerome Powell's address the next day at the Jackson Hole symposium. Markets are increasing the possibility of another 75-basis-point rate rise in September. Still, a recent onslaught of dismal economic data complicates the picture of the Fed's hawkish attitude. U.S. stock index futures are up between 0.65% and 1% daily, reflecting the upbeat sentiment. Later in the day, traders will see the second estimate of second-quarter GDP statistics released by the U.S. Bureau of Economic Analysis.


The Euro gained momentum early Thursday and advanced beyond parity. In the second half of the week, the shared currency appears to be capitalizing on risk flows. In an interview with Madame Figaro, European Central Bank President (ECB) Christine Lagarde stated that further climatic calamities would impact pricing, insurance premiums, and the financial sector. Meanwhile, supporting common currency was the growth figure from Germany, which revealed that the economy increased at an annualized pace of 1.8% in the second quarter, which was higher than the 1.5% forecast.


Despite a rebound attempt during American trading hours on Wednesday, the Briitish Pound failed to post daily gains and closed 0.31% lower. Today, the currency gained traction in the early European session as the dollar faced widespread selling pressure. Meanwhile, rising energy prices have pushed inflation in the UK into double digits, with analysts predicting that it could top 18% next year. Also, the cost-of-living problem continues to weigh on the Pound, with the energy cap set to rise by 80%. One source of support for the Pound is the high probability that the Bank of England (BoE) will continue to raise interest rates to 4% by next year.


On Thursday, the Japanese Yen climbed versus the U.S. dollar, rising further from one-month lows, as investors assessed whether dismal U.S. economic data would impede the pace of Fed rate rises ahead of Fed Chair Jerome Powell's address at the Jackson Hole Symposium on Friday. Meanwhile, Bank of Japan board member Toyoaki Nakamura stressed the importance of maintaining significant stimulus to sustain the country's weak economic recovery. The Bank of Japan is also anticipated to maintain its dovish policy stance, even though Japanese headline and core inflation rates have reached multi-year highs and have remained over the central bank's 2% objective.


The Canadian dollar rose this morning after falling 0.09% yesterday. The risk on mood ahead of the Jackson Hole Symposium drives safe flows and supports the Loonie. Rising crude oil prices are also aiding the Loonie. West Texas Intermediate oil futures rose above $95 a barrel for the third straight session on Thursday, reaching their highest level in three weeks, as signs of tightening supply offset worries of a demand-sucking global economic downturn. In other news, the market is correctly pricing a discussion between 50 and 75 basis points at the Bank of Canada's September meeting. The decision may force a knee-jerk reaction, but the hawkish tone would support the Loonie's upside.


The Mexican Peso gained ground against the greenback on Wednesday, rising 0.42%. In doing so, Peso beats other Latin American currencies as solid inflation data strengthens the case for Mexico's central bank to retain its hawkish stance. Mid-month CPI data indicated an annual inflation rate of 8.6% in the first half of August, exceeding predictions of 8.5% and setting a new record since 2000. Previously, Deputy Governor Jonathan Heath of the Bank of Mexico indicated that the central bank is anticipated to follow the Federal Reserve at its next meeting in late September, as both economies grapple with high inflation and recession fears.


The Yuan rebounded from two-year lows against the U.S. dollar, bolstered by stronger than expected government guidance and general dollar weakening. Experts say that the Yuan will likely fall for the sixth month as China's weak economy pressures officials to maintain an easing bias and implement additional stimulus measures. China increased its stimulus by 1 trillion Yuan to assist its economy in recovering from Covid-related disruptions, property sector troubles, and power shortages. The People's Bank of China cut vital lending rates earlier this week, lowering the one-year loan prime rate by five basis points to 3.65% and the five-year LPR by 15 basis points to 4.3%.


the Brazilian currency closed this Wednesday's session with a marginal loss. In the Brazilian market, the most expected domestic data was the release of the IPCA-15, considered a preview of official inflation. It was -0.73% in the first half of August - with a result, the reading accumulated in 12 months drops to 9.6% in the month compared to 11.4% in July. Despite the optimistic reading, investors will continue to digest the data in the face of rising crude oil prices. Also, experts say that the monetary tightening cycle conducted by the Central Bank since last year still shows difficulties in controlling inflation. That being said, the BC may carry out a new increase at its meeting scheduled between the 20th and 21st of September.


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