Summary
- Dollar index up, yen down vs dollar
- Fed speakers maintain the case for tightening monetary policy
- UK GDP shrinks less than expected
The dollar climbed on August 12 but was still set for a weekly fall as traders sought signs of U.S. inflation peaking.
U.S. inflation figures on Wednesday and Thursday were lesser than estimated, raising riskier assets such as equities and the plunging dollar, as markets interpreted the data as signaling the Fed could be less hawkish in rate increases.
But Fed officials clarified they would continue to tighten monetary policy. San Francisco Federal Reserve Bank President Mary Daly said on Thursday she was open to the probability of a further 75 basis point (bp) rise next month to tame peaking inflation.
Related:Global Inflation Could Be Short-Lived – Former Policymakers
At 1047 GMT, the dollar index gained 0.4% on the day at 105.520, altering course after four days of losses that have put it on track for a weekly fall of 1%. The yen fell on the dollar’s strength, with the U.S. unit rising 0.5% compared to the Japanese currency at 133.62.
Traders were pricing in about a 36.5% possibility of a 75 bps Fed rate rise next month and a 63.5% possibility of 50 bps. Paul Mackel, global head of FX research at HSBC, said in a note to clients:
“We think it will take far more evidence of slowing core inflation to temper Fed tightening. Inflation is also a global problem, not just a U.S. one, and so global growth and inflation dynamics will drive the USD. The likes of the ECB (European Central Bank) and the BoE (Bank of England) may still find it hard to match market pricing for rate hikes, creating downside pressures for EUR and GBP.”
The head of FX strategy at Societe Generale Kit Juckes said dollar trading was expected to remain “choppy”.
Juckes stated:
“It’s not going to be going significantly weaker in a straight line because there’s still a danger that the market has to reprice terminal Fed funds higher, given there’s still plenty of inflation.”
GDP CONTRACTION
The British pound lost 0.8% at $1.212 against the strong dollar. UK GDP shrank by less than feared in June, although an extra public holiday had been predicted to lead to a huge drag. The euro dropped 0.3% to $1.0291. French inflation soared 6.8% year-on-year last month, while for Spain the figure was 10.8%, the strongest since 1984, according to data.
The euro has been weighed down by Europe’s struggles with the hunt for non-Russian energy sources, the conflict in Ukraine, and a hit to the German economy from insufficient rainfall. Low water levels on the Rhine, Germany’s commercial artery, have interrupted shipping and ramped freight costs up more than five-fold.
Buy Crypto NowCommerzbank said in a note to clients it had to amend its euro-dollar forecast lower, as it predicts a euro-area recession as a base scenario, having formerly been a “risk scenario”. Commerzbank forecasts the euro to drop to $0.98 in December and to not rebound until later next year.
Inflation in Sweden subsided to 8% year-on-year last month, which ING said may lower expectations for a huge Riksbank rate rise next month. ING’s Turner said:
“After a good run in July, we doubt the Swedish krona pushes on too much further against the euro.”
The New Zealand dollar climbed on expectations of a Reserve Bank of New Zealand rate hike next week.
