The U.S. dollar tumbled down further on Thursday, plunging to two-month lows after U.S. inflation proved weaker than investors expected in December. As a result, market players decided to cut crowded long positions in the greenback.
Such a move supported the euro. The currency extended its rally to $1.1479 on Thursday, jumping by 0.3% on the day. The British Pound and the Japanese yen also added to their gains.
On Wednesday, much anticipated December’s monthly U.S. inflation figures came out. They were a fraction higher than forecast, though. Analysts also expect the increase at 7% in year-on-year consumer price inflation – its biggest rally since June 1982.
Nonetheless, investors do not see these inflation readings as urgently shifting an already hawkish Fed too much. The Forex market already priced at least three rate hikes, and some traders pared bets on further greenback gains.
On Thursday, the U.S. index plummeted down by another 0.2% to 94.782 against a basket of rival currencies. MUFG analyst Derek Halpenny noted that the scale of the U.S. dollar sell-off must surely be indicative of positioning at least partially. He thinks so much Federal Reserve tightening is now priced in for the next year that expectations for longer-term rate hikes are relatively low, which is keeping the greenback in check.
Halpenny also added that traders seem to be signaling that ending QE (quantitative easing). This, along with rates hiking four times and commencing QT (quantitative tightening) all in the space of 9 months, is so aggressive that it will likely limit the scope for rises further out. In fact, it has reinforced the belief that peak Federal Reserve funds will be below 2%.
How much did the British Pound gain?
The sterling soared during the last session. Market players think that Britain’s economy will be able to survive a surge in coronavirus cases. Moreover, the Bank of England is planning to start hikes next month. Consequently, on Thursday, the Pound climbed up by 0.2% to $1.3738.
Overall, the currency gained more than 4% after December lows. Investors have thus far shrugged off a political crisis enveloping Prime Minister Boris Johnson. The latter has apologized for attending a party in the Downing Street garden during a Covid-19 lockdown.
In Asia, the New Zealand dollar skyrocketed to $0.6876 today. The Kiwi gained 0.4% during the session, reaching its strongest level since late November. The central bank of New Zealand has already begun raising rates, boosting the currency.
Meanwhile, the Australian dollar, which often performs well when broader market sentiment is optimistic, surged forward by 0.3% to $0.7305.
On Thursday, the Canadian dollar has jumped by more than 3.5% in three weeks. Rising oil prices supported the currency as traders looked past the potential economic fallout of the Omicron covid-19 variant.
Commonwealth Bank of Australia strategist Joe Capurso noted that the U.S. dollar does not have to soar because the Federal Reserve is readying a tightening cycle. According to him, it is not a simple equation of agency’s hikes equaling greenback increases. The dollar is a counter-cyclical currency that declines as the world economy recovers.
How did the EM currencies fare?
Most emerging Asian currencies gained on Thursday along with stocks due to the dollar’s weakness. The Thai baht gained the most. It firmed by nearly 0.5% today. The South Korean won, and the Indonesian rupiah also rallied.
Margaret Yang, a strategist at DailyFX, noted that as the roadmap of Fed tightening gets clear, some investors may look for an exit and profit-taking opportunities. She also added that a soft U.S. dollar is generally positive for emerging market assets, stocks, and commodities.
On Thursday, the won climbed up 0.3%. The Bank of Korea’s meeting is due on Friday, and market players expect a 25 basis point rate hike. The won rallied every day this week, adding more than 1% overall.
Meanwhile, Malaysia’s ringgit soared for a fifth consecutive session, boosted by recent gains in oil prices. On the other hand, the latter has weighed on the Philippine peso, sending the currency down by as much as 0.5% during the session.
The Chinese yuan briefly hit a more than two-week high before tumbling down again due to heightened concerns over new coronavirus outbreaks. Besides, some reports showed drawbacks in the economy in December.