The U.S. dollar surged forward on Wednesday. It exchanged hands above a one-week low against major currencies amidst concerns that the highly contagious Delta Covid-19 variant could hinder a global economic recovery.
However, after the U.S. Food and Drug Administration gave full approval to the Covid vaccine developed by Pfizer and BioNTech, traders moved on riskier currencies. They believe that with such news vaccination rates will accelerate soon.
On Tuesday, Dr. Anthony Fauci, the U.S.’ top infectious disease expert, stated that America could get the virus under control by early next year.
On Wednesday, the dollar index climbed up by 0.07% to 92.981 against six rivals, after tumbling down to 92.804 the previous day for the first time since Aug. 17.
The U.S. currency had soared until the start of this week. The dollar index skyrocketed to a nine 1/2-month high of 93.734 on Friday due to concerns about Delta’s economic impact. At the same time, the Federal Reserve hinted a tapering of the stimulus was likely this year, pushing the greenback further into the green.
However, the rapid spread of Delta clouded outlook. In addition, expectations about Fed Chair Jerome Powell indicating a timeline for tapering diminished. Powell will speak at the agency’s annual economic symposium at Jackson Hole, Wyoming, on Friday.
Vasileios Gkionakis, the global head of FX strategy at Lombard Odier Group, noted that markets had a bit of a growth scare, style, and sector rotations. All of that has boosted the greenback because of its safe-haven status. He also added that in the short term, market players are still going to be trading in ranges with an upside bias. All in all, Jackson Hole won’t likely be a big event for the dollar.
How did the greenback trade against other currencies?
The dollar surged forward by 0.06% to 109.745 Japanese yen, another safe-haven currency. Thus, remaining near the middle of the trading range since early July.
Against the euro, the U.S. currency plummeted down by about 0.1% to $1.1744. It stayed near the one-week low of $1.17655 touched overnight.
On the other hand, the British Pound traded flat at $1.3730 after skyrocketing to as high as $1.37475 during the previous session. It reached its strongest level since Nov. 19.
In Asia, the Australian dollar tumbled down by 0.06% to $0.7253 after hitting a one-week high of $0.7271 in the previous session. Kim Mundy, a strategist at Commonwealth Bank of Australia, noted that global growth concerns, or lack thereof, will probably remain the major driver of the greenback until Friday. Furthermore, the risk will likely become higher on Friday. Particularly if Chair Powell reiterates that economic data are consistent with a near-term tapering.
According to CBA, the Fed may announce its intent to taper in September. But it will actually begin tapering in October and finish by September 2022, noted Mundy. She believes the dollar uptrend has further to run.
How did the Chinese Yuan Fare Against the Dollar?
The Chinese yuan declined against a stronger dollar on Wednesday. Over the last several days, a weaker-than-expected official guidance rate and market expectations of policy divergence between the United States and China pushed the yuan lower.
Today, the People’s Bank of China set the midpoint rate at 6.4728 per greenback before the market open. That is 77 pips firmer than the previous fix of 6.4805. However, the rate is a bit weaker than some analysts’ estimate of 6.4697.
According to a trader at a Chinese bank, the midpoint rate is lower than expected. It seems the PBOC doesn’t want its currency to soar too quickly because of the shift of the USD Index.
Meanwhile, the yuan opened trading at 6.4715 per dollar in the spot market. It was changing hands at 6.4777 at midday, trading 72 pips lower than the previous late session close.
The latest Chinese economic data was weaker than analysts forecasted. Thus, some experts believe that policymakers may announce more easing measures to boost activity. Meanwhile, the central bank chief promised to stabilize the supply of credit in a meeting on Monday.
How Will the Fed’s Meeting Influence the USD/CNY Pair?
As we have mentioned above, traders are awaiting hints from the Fed’s Jackson Hole Symposium on when and how it will begin tapering stimulus.
Terence Wu, the FX strategist at OCBC, noted that the policy divergence between the Fed and PBOC is clear. That should limit any RMB strengthening expectations in the near term. He added that the current situation essentially leaves the USD/CNY pair locked in within the 6.4500 to 6.5000 range.
Meanwhile, Mohammed Kazmi, Macro Strategist at Union Bancaire Privée, also stated traders don’t expect any major new guidance to be provided by Fed Chair Powell at Jackson Hole, as the agency continues to watch the recent spread of the Delta Covid-19 variant across the United States. Still, Friday’s meeting will dictate the forex market’s course for the next week at least.