Daily Market Pulse

Dollar hits fresh two decades high

6 minute read


The U.S. dollar index rose to a new two-decade high this morning, boosted by hawkish words from Federal Reserve officials. A chorus of Fed policymakers expressed the central bank's willingness to do whatever it takes to reduce inflation, even if it means risking a recession and increased market turbulence. Meanwhile, when asked at an Economic Club of Washington, DC event, White House National Economic Council Director Brian Deese opposed the concept of another 1985-style currency deal to lower the dollar. Deese also stated that the relative strength of the U.S. economy was a crucial factor in propelling the dollar up against the backdrop of a highly uncertain global environment.


The Euro fell early Wednesday and was trading at its lowest level in over two decades. Earlier in the day, data from Germany revealed that the Gfk Consumer Confidence Index fell to a new low of -42.5 in October, highlighting the poor morale caused by rising energy prices. Meanwhile, the ECB has already begun the tightening cycle by hiking key interest rates by 125 basis points since July and has pledged to continue boosting borrowing costs as inflation shows no signs of abating. ECB President Lagarde recently reiterated that the central bank must continue to raise interest rates in order to control inflation, even if the tighter policy has the unintended consequence of slowing development.


The British recovered yesterday (0.41%). However, it lost its steam today morning and is on the way to record low levels on Monday. Investors worried about the impact of British Finance Minister Kwasi Kwarteng's economic proposals, undermining cable. Kwarteng stated that he was focused on growth rather than market movements and that his £45 billion in tax cuts would help the economy. The IMF, on the other hand, warned that the government's economic plan is likely to deepen inequality, while Moody's warned that unfunded tax cuts were credit negative. In the latest news today, the Bank of England announced to buy long-term government bonds in the United Kingdom "on whatever scale is necessary" to restore stability to the gilt market.


The Japanese Yen is on the mend after falling 0.03% yesterday as a result of the surprise action by the government to arrest the Yen's drop. Meanwhile, the yield on the benchmark Japan 10-year JGB traded above 0.25%, approaching its highest level since December 2015, pressured by rising global interest rates despite the Bank of Japan's special buying operation to curb rising yields. The BOJ stated that it is purchasing government securities with maturities ranging from 10 to 25 years for 100 billion yen and bonds with maturities ranging from 5 to 10 years for 150 billion yen. At its September policy meeting, the BOJ maintained its -0.1% target for short-term interest rates and 0% objective for 10-year government bond yields, increasing the interest rate gap with the U.S.


After closing 0.08% higher yesterday, the Loonie lost steam early today and is now drifting lower against the strong greenback. The 10-year bond yield in Canada has risen beyond 3.3%, reaching its highest level since June, as investors anticipate that the Bank of Canada would need to raise interest rates more aggressively. Canadian rates have been modest in comparison to their G10 rivals in recent months, as investors expected the BoC to lag behind the U.S. Federal Reserve's interest rate hikes. Also, Tiff Macklem, governor of the Bank of Canada, indicated on Monday that inflation in Canada is "too high" and that the Bank of Canada needs to boost interest rates to give the economy time to catch up.


The Mexican Peso is drifting lower today, continuing its losses from the previous session as the dollar strengthens again this morning.  Investors are now anticipating the Bank of Mexico's predicted 75bps rate hike, which will add to the 450bps in rate increases since the central bank began its tightening course. Investors also continued to swallow central government anti-inflationary efforts as President Lopez Obrador secured a deal with corporations to set pricing for critical food goods. On the statistical front, Mexico's jobless rate rose to 3.5% in August, while the country's trade deficit ballooned to about $5.5 billion.


On Wednesday, China's onshore Yuan plummeted to its worst level versus the dollar since the 2008 global financial crisis, while offshore transactions touched a record low, weighed down by prospects of additional Federal Reserve rate hikes. Currency traders said the local currency was reacting to widespread dollar strength in global markets, as the dollar reached a new two-decade high versus a basket of currencies. In recent days, the dollar has benefited from safe-haven demand and a hawkish Fed. Several currency traders claimed corporate dollar buying was quite robust on Wednesday, adding to the Yuan's woes. As a result, in the face of continued dollar strength, the authorities will eventually allow the Yuan to drop further while taking steps to guarantee that any movement is not disruptive.


Yesterday, the Brazilian Real gained 0.19% against the U.S. dollar. International monetary tightening and recession fears are putting pressure on global markets. Tuesday was a day of market recovery, with investors still paying close attention to the fall of the Pound sterling and looking for signals that the U.S. economy may be approaching a recession. Domestically, investors are analyzing the minutes of the Central Bank's Monetary Policy Committee (Copom), which held the basic interest rate steady at 13.75% last Wednesday. Furthermore, the National Consumer Price Index 15 (IPCA -15), which is regarded as a forerunner of the country's official inflation, decreased by 0.37% in September, the second consecutive negative rate.


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