U.S. dollar declined Wednesday. What about Euro and Yen?
The dollar tumbled down on Wednesday. However, it managed to hold on to most of the previous day’s gains after skyrocketing on Federal Reserve officials’ hints at aggressive rate increases. The greenback also drew support amid a U.S.-China flare-up over Taiwan. The dollar index has lowered from a two-decade high against the basket of six major currencies in mid-July as traders reined in expectations of Fed rate hikes.
However, a trio of Fed officials signalled the central bank remains completely united on rising rates to a level that will put a dent in the highest U.S. inflation since the 1980s. That news boosted the dollar index by 0.8% that day. But the index dropped slightly on Wednesday, decreasing by a quarter of a per cent to 106.170.
Still, some analysts think that frictions after the highest-level U.S. visit to Taiwan in 25 years will likely help to bolster the safe-haven U.S. dollar for now. The Chinese government condemned House of Representatives Speaker Nancy Pelosi’s visit. It also began six days of military drills surrounding Taiwan. Meanwhile, Pelosi hailed the self-ruled island as one of the freest societies worldwide. Barring a further escalation, U.S. rate increase bets will likely remain the key driver of the greenback moves.
Currency analysts at MUFG also stated that it was clear that Federal Reserve officials had thought FX market participants had gone too far in paring back rate raise expectations. Consequently, the hawkish Fed comments had an immediate impact. They added that U.S. monthly jobs data is due on Friday. It will help set the tone for the dollar.
How is the Japanese Yen faring?
The yen lost more than 1% versus the dollar on Tuesday. It also declined by 0.1% today, trading at 133.355 yen per dollar. On the other hand, the euro jumped by 0.2% to $1.01855, despite separate data showing monthly drops in both retail sales and business activity in the euro area.
The British Pound also soared against the dollar, climbing up by 0.2% to $1.21770 on Wednesday. A Bank of England policy meeting is on Thursday. Investors expect the bank to raise rates for the sixth straight time.
On Wednesday, the South Korean won and Indonesia’s rupiah dropped slightly against the U.S. dollar. At the same time, most other Asian currencies remained muted as traders eyed the potential fallout from U.S. House Speaker Nancy Pelosi’s visit to Taiwan.
Moreover, bond yields in the region tracked their U.S. peers higher. Its long and short ends ticked up overnight due to hawkish comments from some U.S. Federal Reserve officials. Returns on high-yielding notes in the region, including Indonesia and India, climbed higher to 7.245% and 7.253%, respectively.
Indian yields jumped back from over two-month lows. Market participants in India now await the Reserve Bank of India’s monetary policy decision. It is due later this week. Traders’ views on the size of the rate hike widely differ, fluctuating between 25 basis points (bps) and 50 bps. Meanwhile, analysts with Barclays, Citi, and DBS think there will be a 35 basis points (bps) increase.
What do the analysts say?
According to analysts at DBS Group, the downward pressures on Asia rates will likely remain heavy in the near immediate term. Even though Asia’s inflation continues to soar, hike pricings have already come down to fairer levels. They also added that the growth-inflation trade-off could get even more challenging for Asian central banks, especially if U.S.-China tensions lead to further supply shocks for the region.
South Korea’s won plummeted for a fourth consecutive session, shaving off as much as 0.8% to hit a nearly two-week low. Moreover, the rupiah dropped by 0.2% — experiencing its third straight day of losses — due to simmering U.S.-China tensions.
Among other EM currencies, the Thai baht, the Malaysian ringgit, the Philippine peso, the Taiwanese dollar, and the Singapore dollar all traded within tight ranges. Indonesia, Southeast Asia’s biggest economy, will likely show growth in the June quarter, supported by strong exports and private consumption.
Still, a slowdown in China and global recession risks pose significant risks for EM currencies and economies in the coming months. The data will be available on Friday. Regional equities remained higher broadly, climbing up by half a per cent. But Malaysia’s shares and India’s Nifty 50 plummeted by as much as 0.8% and 0.6%, respectively.
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