Daily Market Pulse

Dollar enters consolidation, yet remains 20-year high

6 minute read


The U.S. dollar index reached its highest point in over two decades on Wednesday (gained 0.56%) before entering a consolidation phase early on Thursday. The Federal Reserve's June meeting minutes revealed a consensus that higher interest rates are required to keep inflation from becoming entrenched. Also, the impending energy crisis in Europe and the political unrest in the UK helped to increase demand for the dollar. With U.S. stock index futures reporting moderate daily gains in the European morning, the market's mood appears to be improving. Coming up, several FOMC policymakers will be delivering speeches later during the day.


On Wednesday, the Euro dropped 0.83% and hit a multi-decade low. In the early European session today, the single currency is staging a minor recovery. Investors are currently considering the potential that Russia could stop supplying gas to Europe, which would cause a recession in the continent. It would be more difficult for the European Central Bank to tighten monetary policy as a result of the economic shock, and the interest rate gap with the U.S would likely grow. Despite this, many analysts from major institutions are certain that the Euro will eventually go below parity. Other data from Germany revealed that Industrial Production increased by 0.2% in May, falling short of the market expectation of 0.4%.


After closing yesterday's trading session 0.17% lower, the British pound appeared to be recovering some of its losses this morning. The pound is struggling with the recession concerns and the nation's political instability. More than 50 members of parliament have resigned since Tuesday, according to the most recent news, and UK Prime Minister Boris Johnson is expected to announce his resignation today. In the meantime, the Bank of England issued a warning that the impact of the conflict in Ukraine had significantly worsened the UK's economic outlook and instructed banks to increase their capital buffers to handle shocks. Additionally, as investors turned their attention away from the political unrest, the FTSE 100 increased by more than 1% on Thursday, building on a 1.2 % gain the day before.


After ending yesterday's session with losses of 0.07%, the Japanese Yen is still moving further down today. The index of leading economic indicators in Japan, a measure of the economy several months in advance that is based on information such as job offers and consumer sentiment, declined from April's four-month high of 102.9 to 101.4 in May of 2022, according to the most recent data releases, as Covid infections increased and the ongoing global economic unrest persisted. Elsewhere, the Nikkei 225 Index increased 1.47%, while the larger Topix Index increased 1.42% on Thursday, recouping session losses and following the lead of a bullish overnight session on Wall Street as investors analyzed the most recent Federal Reserve minutes. 


The Canadian dollar appears to be recouping some of its losses from yesterday, where it declined against the U.S. dollar by 0.07%, amid the uptick in market sentiment. As a result, despite the Bank of Canada's aggressive tightening cycle, the Loonie traded close to a 20-month low in the previous session due to increased risk aversion among investors. Worries about an impending recession in the Eurozone and China's covid-zero laws pressured riskier assets like the loonie. A fall in crude oil futures, one of Canada's main exports, also put pressure on the Canadian dollar at the same time. In contrast, a BoC survey revealed that consumer inflation expectations had risen to a record high in the short term and were much higher over the long term, which has increased the likelihood that a historically rare 75 basis point rate hike will occur later this month.


After falling by 0.61% in the previous session, the Mexican Peso somewhat recovered its losses amid an uptick in market sentiment. In doing so, the Mexican Peso fell to a low that was over four months old, further accelerating the decline of riskier Latin American currencies. Nevertheless, the peso has performed better than other significant Latin American rivals thus far this quarter, such as the Brazil real, thanks in part to the high level of market participants' trust in the Bank of Mexico. Amidst the President of Mexico's adamant resistance, the Mexican central bank has increased borrowing charges six times in a row, demonstrating that its independence has so far held.


The Chinese Yuna closed 0.12% higher in the previous session against the greenback. Despite a generally stronger U.S. dollar, the Chinese yuan edged up on Thursday as investors believed incoming statistics would demonstrate the country's economy's continued recovery from a severe Covid-related collapse in the spring. As lockdowns were lifted in Shanghai and some other major cities in June, official and private business surveys had shown that the situation was improving. However, certain places have recently reported a resurgence of Covid cases, which might impede or even halt a recovery. Elsewhere, the Shenzhen Component increased 0.97% and the Shanghai Composite increased 0.27%, respectively, ending a two-day drop that was aided by increases in the auto and new energy sectors.


After closing Wednesday with 0.35% losses, the Real has extended recent losses as the fundamentalist agenda points to a foggy scenario. Right now, two forces are acting on the Brazilian currency. First, the dollar continues to strengthen against most market currencies in emerging markets, with investors migrating to safe havens and less risky assets. Secondly, the focus remains on the PEC which releases R$ 41 billion just over three months before the elections. The text must be voted on by the committee special of the Chamber of Deputies later today.


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