The U.S. dollar traded close to a 14-month high versus the Euro on Thursday. A rally in energy prices increased the risk for the U.S. Federal Reserve to act sooner to taper stimulus. However, the greenback declined slightly against the common currency, the last trading at $1.1563 per Euro after skyrocketing to $1.1529 during the previous session for the first time since July of last year.
The dollar index also changed insignificantly at 94.153 against a basket of six other major currencies after soaring by almost 0.5% over the past two sessions. It hovered near the one-year high of 94.504 reached last week.
The safe-haven Japanese yen was a tad higher at 111.29 per greenback, trading near the middle of its range of the past week and a half.
Crude oil surged forward to a seven-year high overnight before steading a bit after its recent torrid gains. On the other hand, natural gas rallied to a record high in Europe. Coal prices from major exporters jumped to all-time highs, as well.
Thus far, the U.S. Federal Reserve mainly claimed that inflationary pressures would prove transitory. However, the agency has announced recently that it contemplates the idea of starting to reduce its monthly bond purchases as soon as November. The Fed will then follow up with interest rate increases, which could come as early as 2022.
New data may influence the dollar and other currencies on Friday
The traders are waiting for the U.S. non-farm payrolls report, which is due on Friday. This data could provide additional clues about the timing of the agency’s next moves. Analysts expect it to show continued improvement in the labor market. Thus far, a consensus forecast is for 473,000 jobs to have been added during the previous month.
In addition, investors will be waiting for several speakers from the Federal Reserve and the European Central Bank to make announcements later on Thursday. The Cleveland Fed and the ECB are holding a joint conference on inflation dynamics. ECB policymaker Isabel Schnabel and the Fed’s Loretta Mester are planning to speak.
ING strategists noted that the biggest risk to a firmer dollar index would likely come from any substantial re-assessment of inflation risk from the ECB. The majority of FX strategists think the greenback will remain dominant in the near term. But it will most likely cede ground to its peers in a year.
Meanwhile, concerns around the U.S. debt ceiling eased somewhat. It seems the Senate is near to making a temporary deal to avert a federal debt default in the next two weeks. Mitch McConnell, the Senate’s top Republican, offered that his party would allow an extension of the federal debt ceiling into December 2021.
Commonwealth Bank of Australia strategists stated that such extension could ease some of the near-term upside risk facing the U.S. dollar. However, it would take a more resolute agreement than that to remove the upside greenback risk.
What about EM currencies?
Most emerging market currencies soared on Thursday along with stocks as oil prices declined from recent highs. However, the prospect of U.S. monetary policy tapering, along with an economic slowdown, kept the market mood subdued. MSCI’s index of EM stocks skyrocketed by 1.8% after plunging to a six-week low earlier. At the same time, currencies gained 0.2% after oil prices decreased on an unexpected surge in U.S. inventories.
Hong Kong stocks rallied by 3% on Thursday. The announcement of plans for a new northern metropolis bolstered real estate stocks, helping them move past recent concerns over a debt crisis in the sector.
In addition, most emerging market currencies strengthened while the U.S. dollar retreated. After heightened volatility through the week, risk appetite improved slightly today. Despite that, most currencies, especially those in the Middle East, Europe, and Africa, marked small moves as traders remained worried over potential policy tightening by the Fed ahead of key U.S. payroll data on Friday. Fears of sticky inflation hindering economic growth have also weighed on forex markets in recent sessions.
On Thursday, Russia’s rouble climbed up by 0.1%. It gained less compared to most of its EM peers after data on Wednesday showed inflation skyrocketed to almost 7.5% in early October, reaching its highest point since June 2016.
Analysts at Credit Suisse noted that the data does not require Russia’s central bank to increase the step of the policy rate hike. They expect the bank to hike the policy rate by 25bps.
How did the Polish zloty fare?
The Polish zloty remained flat against the common currency on Thursday. The central bank raised interest rates unexpectedly on Wednesday, boosting the currency to a three-week high. On Wednesday, the zloty skyrocketed by more than 1%, having its best day in more than a year.
Tatha Ghose, the FX, and EM Analyst at Commerzbank, noted that Poland had been in a sticky situation after its central bank chose to ignore an inflation overshoot, claiming it to be transitory. Considering the situation, the bank would have to signal strong intent to continue tightening for the Polish zloty to stop underperforming. The Hungarian forint edged up by 0.2%, as well, while the Czech crown declined by 0.1%.