Daily Market Pulse

Dollar falls as U.S. economy struggles

5 minute read


The U.S. dollar index extended losses during the early hours of the Friday session, edging up to 0.6% lower amid a positive risk on mood despite poor U.S. growth figures. The latest Grosso Domestic Product reading revealed that the economy contracted 0.9% in Q2-22 leaving little room for policymakers to aggressively continue to tighten monetary policy and markets estimate a 20% chance that the Fed will hike 75 bps in September, weighing on the greenback. However, equity markets rallied on the back of growth figures advancing over 1% ahead o the release of Personal Consumption Expenditure, the Fed’s favorite gauge of inflation.


The Euro records 0.5% gains against the dollar on Friday amid a positive risk sentiment driven by lower chances of monetary tightening in September. Growth figures in the U.S. give little to no leeway to Fed officials to hike rates another 75 bps underpinning friendlier conditions to risk takers. The European economic docket will feature the second quarter Gross Domestic Product for the euro area alongside the preliminary harmonized index of consumer prices for July.


The British Pound attempted to capitalize on gains over the greenback hitting monthly highs although it fails to consolidate higher levels and it oscillates very close to its opening prices. The early risk on mood underpinned risky assets as well as expectations that the BoE will increase its benchmark interest rate by 50 bps next week. However, Stealing is set to close its best week since May as risk appetite returns after hitting the lowest levels since 2020 and it is on track to post its first monthly gain since April. However, economists believe that the pound is likely to remain under pressure for the foreseeable future amid a faltering UK economy, faster inflation, and a central bank that's been lagging others in raising interest rates. 


The Yen is the best-performing currency against the greenback during the early hours of the Friday trading session, advancing up to 1.30% as monetary policy expectations remain soft. The Yen raising for the third consecutive day as chances of further rate hikes in the U.S. is lower causing hedging funds to cover short bets from one of the biggest global macro trades this year. This effect is easing pressure from the Bank of Japan which reaffirmed its commitment to rock-bottom interest rates last week.


The Loonie showed small gains (+0.14%) against its US counterpart on Thursday, after the US Bureau of Economic Analysis reported the annual GDP at -0.9%, a consecutive contraction. However, further gains were capped as oil prices stalled. Today, the country will release its latest GDP figures, which could act as a drag on the CAD during Friday’s session, if June’s preliminary figures report another fall in growth - the market forecasts a 0.2% retraction over the period.


Yesterday, the Mexican Peso was able to manage one more positive trading session against its rival USD, registering 0.62% gains. Today, Mexico’s GDP is forecast to have slowed in Q2 - the market estimates that the country’s economy probably grew 1.5% in the second quarter vs. 1.8% prior. If that is confirmed, the MXN might see some pressure during today’s session. Looking ahead, next weeks will be important to see how the talks with the US and Canada on the USDMCA trade deal will develop. Although president Obrador has made clear objections, alleging violations of the trilateral agreement, he denied any intention to pull back from the USMCA agreement.


The Yuan weakened 0.12% against the US dollar in the last session, despite fresh China’s foreign direct investment (FDI) in the first six months of the year rising 17.4% from a year earlier. Apart from the property crisis, now the country needs to deal with ample liquidity in the financial markets. Ideally, this liquidity should be transmitted to the real economy to reach corporate and support real economic activities. Nonetheless, cash-rich lenders and funds have been using the money to buy policy bank bonds and high-grade corporate debt. Also, given the low real interest rates in China, the USD is another beneficiary of the surplus liquidity as the USDCNY pair is supported by the Chinese currency’s deteriorating carry. 


Once again, the BRL extended its gains on the back of a strong technical correction, amid the latest US GDP figures which showed the US economy is cooling down. Since early June, the technical indicator RSI (Relative Strength Index) was firmly in the overbought region, a situation that is unusual from a technical standpoint. After five trading sessions in a row closing with gains, this RSI index now lands in a neutral/sold region, suggesting the BRL’s correction might find an end soon. Meantime, given the amount signs that the US economy is slowing down, investors are cutting off their bets on additional oversized Fed rate hikes, which, in turn, weigh the USD across the board.


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