Dollar recovered from its recent fall. What about Sterling?

The U.S. dollar rebounded on Thursday after lowering in the previous session. However, it still remained below the 20-year highs reached last week, a day after the Federal Reserve confirmed that it would take aggressive steps to fight soaring inflation. The agency played down the prospect of even larger rate hikes for now.

The dollar plunged sharply on Wednesday after Fed Chair Jerome Powell stated that policymakers were not actively considering 75-basis-point moves in the near future. His comment came after the U.S. central bank increased rates by 50 basis points, as traders widely expected.

The greenback regained ground on Thursday, with the euro declining due to weak German data. The latter showed that industrial orders in March suffered their biggest monthly plunge since last October. The U.S. currency was also supported by safe-haven buying as stocks tumbled in the red.

Erik Nelson, a macro strategist at Wells Fargo in New York, noted that Wednesday’s Federal Reserve meeting was the first time in a long time that Powell and the agency have not become incrementally more hawkish. He thinks that’s a game-changer in terms of the one-way upward move in the greenback and rates. Nelson added that what happens now is going to hinge on the data.

Investors will watch consumer price inflation data next Wednesday for any signs that price pressures that have been soaring at the fastest pace in 40 years are easing. However, this week, a major U.S. economic release will be the government’s jobs report for April, which is due on Friday.

How is the dollar trading?

The dollar index exchanged hands at 103.43 at last, higher by 0.87% on the day. It hit 103.93 last Thursday, the highest level since December 2002. On the other hand, the euro plummeted to $1.0551, lowering by 0.67%. It had dropped to $1.0470 last Thursday, the lowest level since January 2017.

The single currency has declined as the eurozone struggles with weaker growth and energy disruptions. The latter is due to sanctions imposed on Russia after its invasion of Ukraine. ECB board member Fabio Panetta stated that ECB should not raise interest rates in July, even though the inflation outlook suggests it can gradually reduce support for the economy. Forex markets expect an ECB interest rate increase as early as July, though.

The British pound decreased after the Bank of England raised interest rates to their highest level since 2009. At the same time, the bank warned that the economy was at risk of recession, causing the decline. Sterling lost 2.10% to $1.2371, hitting the lowest level since July 2020.

EM currencies also suffered. How are they faring now?

Brazil’s real dropped by 2% on Thursday as a surging dollar weighed on it, along with signals that the central bank’s tightening cycle may be ending soon. Meanwhile, the Czech crown soared thanks to a larger than expected hike in interest rates.

Despite that, emerging market currencies struggled broadly due to the surging greenback. South Africa’s rand tumbled down by 3%, on course for its worst session in more than one year. The currencies of Mexico and Chile also plunged by 0.6% and 1.3%, respectively.

Tracking a decline in Wall Street, an index of emerging market shares dropped by 0.4% after adding 1.2% earlier in the session. Furthermore, Brazilian equities slid by 2.4%, while heavyweight Chinese blue chips and Hong Kong stocks traded in the red at the end of the session. Mexican shares shaved off 1.5%, hovering near six-week lows.

On Thursday, the Czech central bank hiked the key rate by 75 basis points to 5.75%, compared to a 50 bps move expected by analysts. The bank has also signaled more tightening. As a result, the Czech crown jumped by 0.2% to 24.555 per euro.

On the other hand, the Polish zloty pared some session gains after the key rate was increased by 75 bps to 5.25%. Moreover, Brazil’s real fell to 5.0046 per dollar after two days of gains. As traders expected, the central bank delivered a 100-basis points interest rate hike overnight. However, it also flagged a smaller increase next month, as well as a more significant risk of economic slowdown.

Currency analysts at Monex noted that higher U.S. interest rates, along with expectations that Brazil’s central bank is entering the latter part of its hiking cycle, had reduced the real’s carry appeal.