The U.S. dollar struggled on Friday as the market sentiment remained tilted towards riskier assets. The currency seemed ready to end the second consecutive week in the red. Meanwhile, an intervention by the Australian central bank halted the Aussie dollar’s recent rally. The dollar index stood at 93.733 on Friday. It changed slightly in Asian hours. Overall, the index declined by 0.24% during the week, as it continues its drop from a 12-month high of 94.565 reached earlier this month.
The dollar had managed to rebound on Thursday, climbing up due to better U.S. jobs and housing data. Despite that, the surge petered out on Friday morning in Asia thanks to the news that beleaguered developer China Evergrande Group has supplied funds to pay interest on a U.S. dollar bond and averted a default. Risk sentiment strengthened after that. Some investors are still trying to assess whether the greenback has scope to decline further or if this is a temporary downfall on a march higher.
Paul Mackel, the global head of FX research at HSBC, noted that traders are wondering whether we are at an inflection point as the U.S. currency has been weakening. That doesn’t fit with the broader narrative that global economic growth is cooling, and the Federal Reserve is on the path to tapering, which should be supportive of the greenback.
On Friday, benchmark 10-year U.S. Treasury yields stood at 1.6872%, slightly lowering from Thursday’s multi-month high of 1.7%. It seems markets continue to prepare themselves for an announcement by the Fed that it will start to taper its massive bond-buying program. People widely expect that to begin in November.
The recent rally in commodity currencies also pushed the dollar back
Mackel noted that strong performances by currencies from most commodity-exporting countries had been part of the reason for the dollar’s weakness. However, these currencies were quieter on Friday as market players took profits and energy prices softened. Brent crude had soared above $86 dollars a barrel on Thursday. But it tumbled down again and was last at $84.10.
Meanwhile, the Australian dollar exchanged hands at $0.7475, plummeting down from Thursday’s three-month high. While Evergrande’s news boosted the China-exposed currency, the Reserve Bank of Australia’s action to stem a bond sell-off and the pause in energy price rises outweighed that report and pushed the Aussie back again.
On Friday, the RBA announced that it had decided to step in to defend its yield target for the first time in eight months. The bank spent A$1 billion to hinder an aggressive bond sell-off as investors have bet on inflation pulling forward rate hikes.
The Canadian dollar decreased to C$1.2352 per U.S. dollar, also affected by energy prices, dropping from Thursday’s C$1.2287, a level last reached in June.
In Europe, the British pound remained steady at $1.3798, lowering from a month top hit earlier in the week. The sterling had rallied due to investors’ growing expectations that an interest rate hike would fight rising inflationary pressures.
The euro changed slightly at $1.1627, as well. On the other hand, the Japanese yen struggled at 114.01, trading within sight of its multi-year lows.
How did the Chinese Yuan and EM currencies fare?
The Chinese Yuan lowered against the greenback on Friday. The FX regulator warned of possible action if the forex market is hit by greater volatility following its recent rally, pushing the Yuan in the red. However, the currency still looked set for the biggest weekly gain since May.
Most emerging market stocks and currencies soared on Friday, thanks to China Evergrande’s news. Russia’s rouble also surged ahead of an interest rate decision. Despite that, most EM assets were set for mild weekly gains. MSCI’s index of EM stocks increased by 0.2%, while currencies added only 0.1%.
Russia’s rouble climbed up by 0.2%, trading near three-month highs against the greenback, as the forex market expected its central bank to raise rates from 6.75%. Turkey’s lira tumbled down by more than 1%, reaching a record low of 9.6581 against the dollar.