The U.S. dollar rallied on Friday against most major currencies. Investors were waiting for crucial U.S. jobs data that could give the green light to an earlier rate hike by the Federal Reserve. On Thursday, several Fed officials reiterated Chair Jerome Powell’s statements about striking a hawkish stance. Richmond Fed President Thomas Barkin threw his support behind the normalizing policy, while San Francisco Fed President Mary Daly noted that maybe it’s time to start crafting a plan to raise rates to fight inflation.
Meanwhile, the continued spread of the Omicron covid variant around the world has bolstered safe-haven currencies like the greenback and Japanese yen. At the same time, it put more pressure on riskier currencies.
Craig Erlam, an analyst at OANDA, noted that from the latest comments by Chairman Jerome Powell and other Fed officials, it’s clear that the plan has changed recently. The agency now intends to taper faster, as well as raise rates sooner and retire the use of the word transitory. However, Omicron might further complicate efforts, even though the economic data seems to start catching up. Erlam thinks that a strong report later on Friday would leave the Fed backed into a corner.
The dollar index climbed up by 0.1% to 96.204 on Friday, and it seems poised for a weekly advance. That would mark a sixth weekly gain for the greenback, the longest stretch since January 2015. Money markets think that there are high odds of the agency raising the target rate by a quarter-point at its meeting in June 2022. On Wednesday, Powell said in testimony to Congress that he and fellow policymakers would consider swifter action at their meeting scheduled on December 15-16.
What do the economists think?
According to economists’ estimation, the United States created approximately 530,000 new jobs last month. The country continues delivering strong data. MUFG analysts noted that whatever the outcome in Friday’s report is, the Federal Reserve will likely push on with confirming a faster taper. However, that may well result in dollar crosses reverting to pre-Omicron levels when they were close to 97.00 on DXY. The EUR/USD pair will probably grind lower toward the $1.1000 level.
The common currency exchanged hands at $1.13 on Friday. It remained unchanged on the day, consolidating after its plunge to a nearly 17-month low at $1.1186 last week. On the other hand, the greenback soared by 0.1% to 113.31 against the Japanese yen. The Sterling declined by 0.2% to $1.3274.
On Friday, the Australian dollar tumbled down by 0.5%, reaching a new 13-month low of $0.7049. The Aussie continued falling for a fourth consecutive session.
The Reserve Bank of Australia and European Central Bank have stuck to dovish stances. They pushed back against FX market bets that policymakers would bow to inflationary pressures.
How did Turkey’s Lira fare?
The Lira tumbled down almost to its record low on Friday, triggering direct central bank intervention selling greenbacks. Rating agency Fitch announced the country’s outlook changed from “stable” to “negative” due to risks created by recent monetary policy easing.
In addition, analysts have widely criticized President Erdogan’s aggressive rate-cutting policy, calling it reckless. They have warned that the central bank cannot properly defend the Lira, considering its depleted reserves.
The currency plummeted down as far as 13.89 against the dollar before strengthening as far as 13.37 after the central bank intervened. On Friday, it exchanged hands at 13.65. Overall, the Lira has lost some 45% of its value against the U.S. currency this year. It touched a record 14 on Tuesday. After that, the central bank began its interventions. Still, the currency has approached 13.9 points three times before jumping abruptly. It seems the government is unwilling to let it blow through 14.
Ipek Ozkardeskaya, the senior analyst at Swissquote, stated that the impact of the intervention is quite small because the forex markets know that the reserves are melting. He added that high inflation calls for rate adjustment. On the other hand, selling the reserves only weakens the central bank’s hand. Thus, it will likely have an increasingly limited impact on the Lira moving forward.
On Friday, new data showed annual inflation rose more than expected, hitting a three-year high of 21.31% in November. This report further exposed the risks of recent aggressive rate cuts.