Daily Market Pulse

Dollar set for a fifth weekly advance

6 minute read


The U.S. dollar index stayed strong on Friday and remains on track to record its fifth straight week of gains after closing 1.12% higher yesterday, as investors continued to bet on further Federal Reserve monetary tightening to bring decades-high inflation under control. So far this week, the dollar has gained nearly half a percent, holding near its highest level in 20 years and mirroring rises in Treasury yields, while the benchmark U.S. 10-year Treasury yield exceeded 3.1% overnight. The Fed hiked its benchmark overnight interest rate by 50 basis points on Wednesday, the largest increase in 22 years, although Chair Jerome Powell ruled out a 75 basis point hike in the future. Morale remains low, following a hefty loss session yesterday as U.S. equity markets turned negative on Friday morning as a result of the Fed's hawkishness, with futures on the S&P 500 falling 0.6% and futures on the Nasdaq 100 falling 0.6%. Moving forward, investors are looking forward to the April jobs report, which is out later today and might strengthen the case for rapid monetary policy tightening. 


The Euro closed 0.75% lower in the previous session before extending its losses Friday morning. The common currency fell against the U.S. dollar as the risk aversion swept back into the markets amid the high inflation, the Ukraine-Russia conflict, and China's lockdown. Also, the European Central Bank's (ECB) dovish stance amid the tightening cycle U.S. Fed and the Bank of England is weighing heavily on the currency. Meanwhile, according to persons familiar with the situation, the European Union has proposed a change to its Russia oil sanctions restriction that would give Hungary and Slovakia an extra year, until the end of 2024, to comply. In other news, European markets continued their losses, plunging more than 1%, and were on course for their worst weekly drop in two months. 


The Pound sterling plunged 2.13% yesterday and continued to post losses this morning against the greenback. After the Bank of England raised interest rates by 25 basis points, the British pound fell to its lowest level in nearly two years against the dollar as the current level of the hike was already priced in by traders. Some market participants were pricing in an even more hawkish statement, while a warning that Britain could enter a recession piqued the bearish tone. Furthermore, the Sterling has been under strong pressure versus the dollar on forecasts of aggressive Fed tightening and its safe-haven appeal amid a bleak global economic outlook. In other news, the FTSE 100 fell on Friday amid a gloomy tone in global markets, weighed down by stagflation fears and tightening monetary policy, as the earnings season continued.


The Japanese Yen closed 0.86% lower in the previous session against the greenback and extended its losses today. In the latest news, the core consumer price index for the Ku-area of Tokyo climbed 1.9% year on year to 101.3 points in April 2022, the quickest rate since March 2015. The spike in inflation, driven primarily by food costs and the dissipating effect of previous cellphone fee cuts, confirms economists' consensus that Japan's price rises will speed to the central bank's 2% objective in the coming months. In other news, the Nikkei 225 Index surged 0.69%, while the wider Topix Index rose 0.93% on Friday after returning from a three-day holiday, defying a global equities selloff fuelled by expectations of aggressive monetary tightening by global central banks.


The Loonie closed 0.68% lower in the previous session before extending its losses on Friday morning. The Canadian currency drifted lower as the risk aversion in the markets, caused by aggressive monetary policy tightening by several central banks, is triggering investors' rush to safe havens. In March, Canada's economy experienced a rise in trade with the rest of the world, as rising commodity prices, robust domestic demand, and a smoother global supply chain propelled both imports and exports. Elsewhere, the Toronto Stock Exchange S&P/TSX composite index fell 2.3%  to a 14-week low on Thursday, its biggest drop since November 30th and mirroring a sharp drop on Wall Street amid concerns about an economic slowdown due to higher interest rates, with technology shares among the worst performers following Shopify's disappointing earnings.


The Mexican Peso plunged 1.08% in the previous session before regaining its momentum slightly against the greenback on Friday morning. The Mexican Peso has taken a hit by risk aversion sentiment triggered by several central bank rate hikes, the Ukraine-Russia war, and China's lockdown which undermine growth prospects globally. Meanwhile, the Mexican government has reached an agreement with major corporations to temporarily control prices on 24 food and other essential necessities in an effort to cool inflation, which has reached two-decade highs. Following the announcement of the agreement, Lopez Obrador stated that the government must do all possible to create conditions that prevent interest rate hikes, as low-interest rates stimulate economic growth and investment in the country


The Chinese Yuan closed 0.97% lower against the greenback as the markets open after the holiday season. After China's top decision-making body warned against criticism of its contentious "dynamic zero-Covid" policy, the Yuan weakened against the U.S. dollar on Friday, reaching its lowest in 12-years and extending significant losses sustained in April. The zero-tolerance policy, which relies on severe lockdowns and mass testing, has weighed heavily on the economy and highlighted the need for additional policy easing. This was in stark contrast to other major economies, with the U.S. rapidly raising interest rates to combat inflation. Diverging monetary policies have also harmed China's yield advantage, with the 10-year U.S. yield currently trading significantly higher than its Chinese counterpart.


Yesterday, the Brazilian currency tried to recover some losses in the wake of hawkish comments by the Central Bank of Brazil, however, the currency's selling pressure was piqued as investors turned their attention to the renewed fear of a monetary shock in the U.S. As a result, the Real dropped 1.61%. Meanwhile, the global narrative must remain the same, with the participants still pricing in escalating global inflation and potential economic recession due to the monetary tightening already observed in numerous emerging economies and developed ones. This sense of deterioration in global economic activity favors the U.S. dollar, which acts as a safe haven asset, draining liquidity from emerging markets like Brazil.


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