FX Rate News

The U.S. dollar traded at a two-month high and was set for a fifth day of gains on Thursday as investors sought safety on concerns over economic recovery as coronavirus cases surged in Europe and on U.S. data showed rising unemployment claims.

Federal Reserve policymakers have called on the U.S. government to provide more fiscal support, fuelling a bout of selling in risky assets overnight, while European economic data has worsened in recent days prompting investors to lighten their positions after a rally in August.

Initial claims for state unemployment benefits increased 4,000 to a seasonally adjusted 870,000 for the week ended Sept. 19, compared to 866,000 in the prior week and economist expectations for 840,000 applications.

“The U.S. dollar weakness theme got over-extended and there are people covering their shorts and wondering if the weaker dollar trend has had enough. Economic data could play into that narrative,” said Katy Kaminski, chief research strategist and portfolio manager at AlphaSimplex Group, in Boston.

The dollar index, which measures the greenback against a basket of major currencies, was last up 0.08% at 94.46 after earlier rising to 94.59, its highest level since July 24.

Appetite for riskier assets was already souring on Wednesday after data showed U.S. business activity slowed in September and new restrictions to stem a surge in coronavirus infections in Europe hit the services industry.

Also puncturing market optimism were concerns U.S. policymakers will struggle to reach an agreement for more fiscal stimulus as the Nov. 3 presidential election looms.

“Optimism on the recovery, optimism on the virus, and bets on stimulus were keeping markets well bid, and on all three of these issues, there has been a degree of disappointment this month,” said John Velis, an FX and macro strategist at BNY Mellon.

Federal Reserve officials on Wednesday doubled down on efforts to convince investors they will keep monetary policy easy for years to allow unemployment to fall, emphasizing that interest rates will stay near zero until inflation gets to 2% and stays there.

Boston Federal Reserve Bank President Eric Rosengren said on Thursday the U.S. economy was far from maximum employment or 2% inflation, and that interest rates would stay low for several years.

The Norwegian and the Swedish crown came under particular selling pressure. The dollar was last up 1% against the Swedish crown after touching its highest level against the currency since July 14. The dollar was up 0.64% and at its highest since July 1 against the Norwegian crown.

The British pound was slightly higher after the country’s finance minister Rishi Sunak announced a new job support scheme, but said the government wouldn’t save every job.

The euro was down 0.12% against the dollar at $1.1645.

EU health officials warned on Thursday that a surge in COVID-19 cases in Europe risks becoming a deadly double epidemic of flu and coronavirus infections as they urged Europeans and their governments not to let their guard down.

The dollar was steady in early Asia trading on Friday after falling overnight as downbeat U.S. data cast a shadow over the economic outlook, while the Japanese yen stabilized after rising against the greenback and the euro the previous day.

The dollar gave up gains made after the Federal Reserve upgraded its 2020 GDP forecast this week to trade in negative territory on Thursday. It was last quoted at 92.866 against a basket of major currencies, and was on track for a 0.3% weekly loss.

A stream of U.S. data showed jobless claims remained elevated at 860,000, while both housing starts and the Philadelphia Fed business index fell. The Fed this week said it expected the U.S. economy to shrink by far less than previously forecast in 2020 and promised to keep rates ultra-low for a prolonged period.

The safe-haven yen last traded at 104.76 per dollar, after hitting a seven-week high at 104.52 on Thursday. Against the euro, the yen hovered near the 1-1/2 month high of 123.29 touched overnight, changing hands at 124.14.

“The dollar/yen dropped overnight almost too much, although it’s been falling since Monday,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

He said losses in U.S. stock futures were also contributing to a weaker dollar. U.S. stocks fell on Thursday as technology-related shares slid for a second day and as the downbeat economic data weighed on the wider market.

“For the dollar to regain its upward trend, it’s necessary for the market to make sure that the U.S. stocks take a pause from a correction in stock prices,” he said.

Sterling bought $1.2986, having lost around one cent on Thursday after the Bank of England said it was looking more closely at how it might implement negative interest rates amid rising coronavirus infection cases, higher unemployment and a possible new Brexit shock.

But the cable later erased losses after the Financial Times reported that European Commission President Ursula Von der Leyen said she was convinced a trade deal with Britain was still possible.

The euro, meanwhile, was little changed at 1.1853 per dollar on Friday. The euro zone PMI data next week will be a key focus, with some analysts saying a strong PMI could take the common currency back to the 1.19 level versus the dollar.

The Australian and New Zealand dollars were marginally stronger in Asian trade, with the Aussie 0.15% higher at $0.7323 and the kiwi trading up 0.34% at $0.6778.

The offshore yuan was trading at 6.7524 per dollar after hitting a high of 6.7332. The yuan has risen more than 6% from lows against the dollar in late May as China’s economy has recovered from the fallout of the coronavirus crisis, although its rapid rise has raised some concerns.

The Swiss franc was last quoted at 0.9078 against the greenback.

The Japanese yen inched higher on Wednesday as traders bet an ultra-accommodative U.S. Federal Reserve would weigh on the U.S. dollar, while the Chinese yuan extended gains one day after data pointed to better prospects for the world’s No. 2 economy.

The Fed is due to make its first policy statement since adopting a more tolerant approach to inflation later on Wednesday.

Traders bought yen on the belief the U.S. central bank may promise further stimulus, which would likely weaken the U.S. dollar and push Treasury yields lower. The Fed is not expected to move on rates but adjustments to bond purchases are possible.

The yen touched a two-week high of 105.25 per dollar, but investors reduced dollar shorts, or bets that the dollar would fall, after months of weakness in the greenback.

Against other majors, the dollar drifted lower or held steady – last trading 0.1% softer against a basket of currencies and a tad weaker on the Aussie and kiwi.

“Dollar/yen is one of the more attractive ways to play for a dovish Fed,” said Westpac currency analyst Sean Callow, adding that the yen was particularly sensitive to the U.S. bond market given Japanese investors are large buyers of U.S. debt.

“You can brace yourself for some choppy price action around the announcement, but when the dust settles you would think that we’ll be seeing a Fed that’s leaning towards looser policy to match what they’ve already announced,” Callow said.

Through the Asia session, the yen rose 0.2%. The Australian dollar rose by the same margin to $0.7317 and the New Zealand dollar edged higher to $0.6727.

The euro was steady at $1.1847 and sterling crept higher to $1.2914 on hopes that a British plan to break its Brexit treaty will not come to fruition.

The Fed decision is due at 1800 GMT followed by a news conference from Chairman Jerome Powell half an hour later.

Besides immediate policy, a major focus will be on the Fed’s economic projections, especially if it spells out where it sees inflation headed and what exactly that means for rates under its new regime.

Paucity of detail could lift the dollar a little, though analysts felt that would probably be short-lived.

“The market overall knows that the Fed wants to be dovish. It’s just that the timing may not match what the market wants in terms of giving details in this meeting,” said Bank of Singapore FX analyst Moh Siong Sim.

Runaway yuan

Beyond Fed positioning a soaring yuan was the other driver of trade in Asia on Wednesday.

In offshore trade, the Chinese currency made a fresh 16-month high, hitting 6.7652 per dollar as it extended a decisive leap in the wake of strong retail sales and industrial output data on Tuesday.

That pulled the South Korean won to a 7-month high and the Malaysian ringgit to its highest since February.

The strongest fixing of the yuan’s onshore midpoint since May 2019 was also seen as signal that policymakers don’t mind a strong currency amid a broader policy shift towards growing China’s domestic economy.

The yuan has risen more than 5% over the past four months.

“The Chinese currency is, for me, the surprise of the year since May,” said Davis Hall, head of capital markets in Asia at Indosuez Wealth Management.

“People are starting to embrace a new theme, which is that China is managing much, much better than anyone else,” he said.

“China, effectively, while they move their business model towards an internal demand story, wants to have a stronger currency to reduce their commodity import bill,” he said. “They can live now, with a stronger currency, with much less need to devalue.”

The dollar dipped against riskier currencies on Tuesday as hopes for a Covid-19 vaccine and big corporate deals improved investor appetite for riskier currencies.

The yuan jumped to a 16-month high as a series of Chinese data points to steady economic recovery in China while the Australian dollar was bolstered by policy minutes from the country’s central bank which stopped short of signalling a further cut to the cash rate.

The dollar index slipped to 92.910, pulling away further from a one-month high of 93.664 touched last Wednesday.

The euro inched up 0.2% to $1.1889, extending its rise into a fifth straight day, with an initial resistance seen at around last week’s high of $1.1917.

The dollar traded at 105.66 yen, near its two-week low of 105.55 yen touched on Monday.

Helping sentiment, AstraZeneca resumed British clinical trials of its Covid-19 vaccine, one of the most advanced in development, while Pfizer Inc and BioNTech SE proposed expanding their phase three vaccine trial.

“It was uplifting that Pfizer has made clear a target of vaccines. As risk assets bounced back, the dollar has lost momentum,” said Kyosuke Suzuki, director of forex at Societe Generale.

Wall Street shares recovered as several multi-billion dollar deals – including Nvidia’s $40 billion purchase of chip designer Arm – lifted confidence.

The Australian dollar gained 0.4% to $0.7316, as highly anticipated minutes from the central bank’s September monetary policy meeting gave no hint that record low interest rates will be cut further.

The Chinese yuan rose to a 16-month high in both offshore and onshore trade, thanks to China’s robust economic fundamentals.

Industrial output accelerated the most in eight months in August, while retail sales grew for the first time this year, suggesting the economic recovery is gathering pace as demand starts to improve more broadly from the coronavirus crisis.

“We have evidence of strong exports from China while Chinese tourists, who would have spent $260 billion overseas in normal years, are not going abroad this year, reducing yuan selling,” said Ei Kaku, senior strategist at Nomura Securities.

“Chinese authorities have not tried to rein in the yuan’s rise for the past couple of weeks even as it has strengthened, leading people to expect further appreciation in the yuan.”

The yuan’s strength helped to lift MSCI emerging market currency index to a six-month high.

The British pound bounced back to $1.2855, following a fall of 3.66% last week, showing limited reaction after the UK government won an initial Parliamentary vote on its controversial bill to violate the Brexit deal with the European Union.

Still, traders said the currency looks vulnerable as the EU warns British Prime Minister Boris Johnson’s bill would collapse trade talks and propel the United Kingdom towards a messy Brexit.

Investors now look to central bank policy meetings in the United States on Wednesday and in Japan and Britain on Thursday.

This week’s Federal Reserve meeting will be its first since Chairman Jerome Powell unveiled a shift toward greater tolerance of inflation, effectively pledging to keep interest rates low for longer.

Projections from Fed policymakers that inflation will remain below 2% in their economic forecasts, to be extended to 2023 this time, could strengthen expectations that interest rates will stay low for a long period of time, analysts say.

The dollar was poised for its first back-to-back weekly gains since May on Friday as jitters in equity markets had investors sticking to safer assets, while sterling tracked toward its worst week since March on fears of a messy hard Brexit.

After a volatile New York session, the greenback was broadly steady in Asia. Marginal moves higher in the Aussie, kiwi and euro were all too small to dent a bounce in the dollar that came with Thursday’s Wall Street selloff.

“It’s exhaustion today,” said National Australia Bank senior currency strategist Rodrigo Catril in Sydney, as traders frazzled by a bumpy week look ahead at risks ranging from next week’s Federal Reserve meeting to U.S. politics and Brexit.

“We think that in this sort of environment of uncertainty its difficult to see the equity market continue to perform. A period of turbulence seems more likely, and in that scenario the dollar tends to find support, or at least struggles to weaken.”

Markets are also looking to U.S. consumer price data due at 1230 GMT for an insight into the recovery and to the challenge facing the Federal Reserve as it looks to lift inflation.

Against a basket of currencies, the dollar was a touch lower midway through Asian trade, but ahead by about half a percent for the week. It has now recouped about 1.7% from a 28-month hit low early in September.

The yen was broadly steady for the week at 106.14 per dollar. Goldman Sachs analysts said pension fund flows out of Japan had offset a safety bid as U.S. stocks fell.

The Australian dollar rose 0.3% to head toward a flat finish for the week at $0.7275, while the New Zealand dollar edged 0.1% higher to $0.6660. Bond inflows have not been enough to prevent a nearly 1% dip in the kiwi this week.

“The dollar looks delicately poised having bounced from recent lows,” ANZ analysts said in a note.

“The Fed still has a mountain to climb if it wants to drive inflation higher, and the September meeting may provide some insight on how exactly it plans to do that.”
Wild ride

Asia’s steady session followed wild trade in the wake of Thursday’s European Central Bank meeting and a falling out between Britain and Europe over Brexit that hammered the pound.

The euro whipsawed, first zooming 1% higher to $1.1917 after European Central Bank President Christine Lagarde insisted the bank does not target the exchange rate, before falling back to around $1.1830 as a U.S. equities slump lifted the dollar.

The Nasdaq dropped 2% overnight and has fallen 9.6% from a record high made on September 2.

Sterling, meanwhile, just fell.

The European Union told Britain on Thursday it should urgently scrap a plan to break their divorce treaty.

But Britain has refused to budge and pressed ahead with a draft law that could sink four years of Brexit talks by fiddling with agreed-upon arrangements for Northern Ireland.

The outcry from Europe sent the pound to a six-week low of $1.2773 and it mostly stayed there on Friday, last trading at $1.2812. It has lost 3.5% on the dollar this week and about as much against the euro to sit at 92.32 pence.

“The selling was relentless,” said Chris Weston, head of research at brokerage Pepperstone in Melbourne.

“Clearly the pound is wearing a greater political premium,” he said, adding that near-term volatility gauges had spiked dramatically.

In emerging markets, the Indonesian rupiah dropped nearly 0.7% to a four-month low of 14,920 per dollar as a planned return to coronavirus social restrictions in Jakarta unnerves investors.