The U.S. dollar skyrocketed to a one-week high against the other major currencies on Wednesday. Higher Treasury yields and a declining euro bolstered the greenback a day ahead of a European Central Bank policy decision. The currency has been trading in the red for an extended period. In fact, some analysts haven’t expected such a rally so soon.
On Wednesday, the dollar index exchanged hands 0.1% higher at 92.628 against the six rival currencies after earlier jumping to 92.655, a level last seen on September 1.
On the other hand, the euro traded decreased by 0.1% at $1.1831 after plunging to $1.1828, its lowest level since September 1, 2021.
Boosted by higher U.S. yields, the dollar also surged forward against the Japanese yen to a 3-1/2 week high of 110.45 before dropping to 110.22 yen. The benchmark 10-year Treasury note soared to a 1.385% high on Tuesday. This is its highest level since mid-July. The benchmark climbed by almost six basis points after Friday’s close.
What’s the analysts’ view on the market’s course?
Viraj Patel, the global FX and macro strategist at Vanda Research, noted that the greenback moved in lockstep higher with U.S. yields since currency markets have returned from the U.S. Labor Day holiday. So, traders’ focus turns to central bank meetings now – with the ECB scheduled tomorrow and the Federal Reserve later this month.
He added that traders had seen a dovish Fed reaction since Jackson Hole (fueled by weak jobs report last week). So, the risks are that forex markets may be seriously underestimating the odds of a hawkish September FOMC.
The dollar index plunged to a one-month low at the end of last week. However, a surprisingly weak U.S. payrolls report prompted investors to speculate whether the Federal Reserve will forgo starting a taper of its stimulus after this month’s policy meeting.
Meanwhile, strong wage growth hints that the potential for inflationary pressures may grow. Ken Cheung, a strategist at Mizuho Bank in Hong Kong, stated that this week’s dollar rally seems to result from a shift in trader focus to wage growth. The latter also suggests that the Fed may continue executing its tapering plan. Cheung added that analysts look for further upside for the greenback.
Will the Fed slow down with the stimulus aid earlier than planned?
Coronavirus deaths increased significantly in the United States. That may give the central bank pause. According to the latest data, more than 20,800 people died from the Covid-19 in the past two weeks. That’s higher by about two-thirds from the prior comparable period. President Joe Biden will speak about his plan to hinder the spread of the highly contagious Delta variant on Thursday.
Besides, New York Fed President John Williams is speaking later today. Investors are waiting to see if he drops any hints on whether the labor market is still on the agency’s stated path of further progress needed for a taper.
Despite the slowdown of the jobs last month, the central bank should go forward with its plan to start trimming stimulus this year – commented St. Louis Fed president James Bullard.
On the other hand, Rodrigo Catril, a senior foreign-exchange strategist at National Australia Bank, stated that risk aversion on the market alongside the jump in UST yields has helped the dollar extend its post-payrolls rebound. Catril thinks that traders are wary of the ECB meeting on Thursday. They anticipate a potential tapering of the Pandemic Emergency Purchase Program’s bond-buying pace.
Some experts see PEPP purchases dropping as low as 60 billion euros a month from the 80 billion before a further plunge early next year and the scheme’s end in March.
How did the Australian dollar fare?
On Tuesday, the Reserve Bank of Australia announced that it would forge ahead with a taper of bond purchases. The bank also made the dovish concession of extending the program to February. However, these decisions helped undermine the Australian dollar. It plummeted down by 0.3% to $0.7366 on Wednesday, after dropping by 0.7% during the previous session.
The Canadian dollar also tumbled down by 0.2% at C$1.2674 per dollar after losing about 0.9% overnight. Declining oil prices weighed on the currency, while traders anticipate a dovish narrative from the Bank of Canada’s policy meeting, scheduled later Wednesday. NAB’s Catril noted that the country also suffered an unexpected economic contraction last quarter.
Meanwhile, emerging Asian currencies weakened against a stronger greenback. Thailand’s baht and South Korea’s won struggled the most.
Equities in Jakarta plunged by 1.2% to their lowest level since August 27. As a result, the USD/IDR pair declined by 0.4% to 14,265.
The Malaysian ringgit also fell slightly. This occurred as stocks in Kuala Lampur remained relatively flat a day before Bank Negara Malaysia’s policy decision.
At the same time, the baht plummeted down by 0.5%, as the dollar hit a one-week peak. The won also decreased by 0.6%. Meanwhile, a senior official in the Philippines announced that the country’s capital region would remain under the second strictest Covid-19 restrictions.