U.S. Dollar Declined Friday while Other Currencies Rallied

The U.S. dollar has seemed poised to suffer its first weekly decline against major peers on Friday since the start of last month. It dropped back from a one-year high while investors contemplated when the Fed would start raising interest rates.

 On Friday, the dollar index tumbled down by 0.1% to 93.945 against the basket of six rival currencies. It is now on track for almost a 0.19% decrease this week. Before that, the index had skyrocketed to the highest level since September 25 of 2020, at 94.563 on Tuesday. However, improved market sentiment has lifted global stocks since then. Soaring commodity prices and bond yields are also weighing on the safe-haven greenback.

 The Japanese yen is the only currency that continued trading in the red against the U.S. dollar. Against the safe-haven yen, the greenback has managed to maintain the momentum of the past five weeks. It soared by 0.33% yen on Friday, briefly jumping to 114.075 yen for the first time since December 2018.

 Chris Weston, the head of research at brokerage Pepperstone in Melbourne, noted that risk sentiment is especially strong currently; equities are rallying, and the yen has no place as a hedge because it would drag on portfolio performance.

 Since early September, the U.S. currency had rallied due to expectations that the U.S. central bank would tighten monetary policy more quickly than traders expected previously. Improving the economy and surging energy prices supported such sentiment.  

 This week, minutes of the Fed’s September meeting confirmed that a tapering of stimulus would start this year. However, policymakers are still sharply divided over inflation and how they can manage it. Currency markets are pricing in about 50/50 odds of a 25-basis point rate hike by July.

What do the analysts forecast for the Greenback?

 According to Westpac strategists, the dollar index seems a little shaky. Despite that, any decline should prove modest with the agency’s tapering now imminent. They also added that any drops in the index should be limited to 93.70.

 Traders are waiting for the release of retail sales figures later on Friday for another significant glimpse of the U.S. economy’s health. The head of FX strategy at National Australia Bank, Ray Attrill, noted that investors see the risks for an earlier rates lift-off. However, they have also priced a lower terminal rate, betting on the projected one-year rate five years from now, tumbling to 1.63% from 1.97% over the course of the week. He also stated that this drop in terminal Fed Funds pricing might explain why the greenback is trading a bit lower on the week. 

Meanwhile, the euro climbed up by 0.08% to $1.16065 on Friday, after hitting $1.1624 on Thursday for the first time since September 4. The British pound also edged up by 0.1% at $1.36835 after skyrocketing to the highest peak since September 24 at $1.3734 overnight. 

In Asia, the risk-sensitive Aussie dollar surged by 0.1% to $0.7423, nearing the more than one-month high of $0.74265 of the previous session. New Zealand dollar also soared by 0.35% to $0.70585 on Friday, extending Thursday’s 1% rally. It earlier hit $0.7060, the highest level since September 24 at $0.70415.

How did the EM currencies fare?

Most Emerging market currencies rallied on Friday. South Africa’s rand led gains across Europe, Africa (EMEA), and the Middle East with 0.6% gains. This week, the rand was the best performer among EMEA currencies. It has a relatively higher yield than its peers. Thus, the currency tends to show large gains when sentiment improves.

The Russian rouble also added 0.7% this week as firmer oil prices supported it. Major crude stocks boosted Russian stocks to record highs this week.

 The Thai baht also gained handsomely this week. It surged forward by more than 1.8% amid growing hopes that the lifting of Covid-19 restrictions would help the country’s economy.

 However, data showed that Polish inflation soared in September compared to last month. That data will likely cause more pressure on the central bank to raise interest rates further. Consequently, the zloty traded flat against the euro.