Dollar falls from three-month high as traders unwind risk

The dollar fell on Thursday from a three-month high against a basket of peers, with the euro getting a boost as investors unwound bets on risky currencies and as concerns over the spread of COVID variants increased the demand for safe havens.

The greenback was weaker against the euro, the Japanese yen and the Swiss franc, which are generally low-interest rate, stable markets that traders short, using the proceeds to buy riskier assets, said Marvin Loh, senior global markets strategist at State Street.

But with bond yields rising and equity markets tanking, riskier positions in currency markets were sold off, benefiting the euro, as well as the yen and the franc, which are also considered safe-haven currencies.

“When you have this kind of unwind going on, you’ve got strength in those currencies,” said Loh.

The euro held on to earlier gains after the European Central Bank set a new inflation target and claimed a role in fighting climate change after a strategy review, with the single currency last up 0.39% against the dollar, at 1.18365.

The dollar was 0.71% weaker against the yen at 109.825, with the yen having earlier touched 109.535, its strongest since June 11, while the Swiss franc touched 0.9134 versus the greenback, its firmest since June 17.

The dollar index, which measures the greenback against six rivals, was down 0.297% at 92.493 from Wednesday, when it reached 92.844 for the first time since April 5.

The global spread of Covid variants has added to fears that there could be some disappointment in terms of economic growth in the coming months, said Mazen Issa, senior FX strategist at TD Securities.

“While we are cautious in interpreting price action at a time of the year when liquidity is not as plentiful, we think markets are contemplating a potential growth scare as the Delta variant spreads and infections rise,” he said.

Riskier currencies, like the Australian and New Zealand dollars, tumbled, with the Aussie down 0.78% at $0.7426, touching its weakest level since mid-December, and the Kiwi dropping 1.08% to $0.6943.

Data on Thursday showed the number of Americans filing new claims for unemployment benefits rose unexpectedly last week, an indication that the labor market recovery from the Covid-19 pandemic continues to be choppy.

“It’s an indication that if these numbers continue not to be anything stellar, or that we’re not moving towards full employment, that leaves the Fed room to just take it easy and not necessarily think about a tapering timeline,” Juan Perez, senior currency trader at Tempus Inc, said of the data.

Minutes of the U.S. Federal Reserve’s June policy meeting released on Wednesday showed that while the economic recovery “was generally seen as not having yet been met,” Fed officials agreed they should be poised to act if inflation or other risks materialized.

A Reuters poll expects the Fed to announce a strategy in August or September for tapering its asset purchases. While most predict the first cut to its bond-buying program will begin early next year, about a third of respondents forecast it will happen in the final quarter of this year.

Dollar solidly poised near 3-month high after Fed minutes reaffirm taper timeline

The dollar traded near its highest in three months versus major peers on Thursday after minutes of the Federal Reserve’s June policy meeting confirmed the world’s biggest central bank is moving toward tapering its asset purchases as soon as this year.

The dollar index, which measures the greenback against six rivals, edged up to 92.759 after touching 92.844 overnight for the first time since April 5.

Fed officials said substantial further progress on economic recovery “was generally seen as not having yet been met,” although participants expected progress to continue and agreed they must be ready to act if inflation or other risks materialize, according to the minutes of the Federal Open Market Committee (FOMC)’s June policy meeting released Wednesday.

“Various participants” at the session still felt conditions for curbing the bond-buying that is supplying markets with cash would be “met somewhat earlier than they had anticipated,” while others saw a less clear signal from incoming data, the minutes showed.

Economists polled by Reuters expect the Fed to announce a strategy for tapering its asset purchases in August or September. While most predict the first cut to its bond-buying program beginning early next year, about a third of respondents forecast it will happen in the final quarter of this year.

“The FOMC remains one of the more hawkish central banks under our coverage,” and will begin to discuss a taper at the policy meeting at the end of this month, Commonwealth Bank of Australia strategist Carol Kong wrote in a client note.

“We therefore expect the USD to trade with an upward bias.”

The dollar was flat at $1.1791 per euro, just off a three-month peak of $1.17815 touched overnight, when German data raised doubts about the strength of Europe’s economic recovery.

Investor sentiment in Germany, the euro zone’s biggest economy, fell sharply in July, though it remained at a very high level, the ZEW economic research institute reported.

Later Thursday, European Central Bank President Christine Lagarde will hold a press conference after the monetary authority announces the outcome of an 18-month strategy review, which is likely to include a shift in the inflation target to 2% from “below but close to 2%” currently – which would theoretically allow for inflation overshoots.

Elsewhere, the dollar traded slightly lower at 110.585 yen, as the pair continued to be weighed down by a slide in U.S. Treasury yields.

The benchmark 10-year Treasury note yielded 1.3196% on Thursday in Asia after dipping to 1.2960% overnight for the first time since mid-February.

The Australian dollar, widely viewed as a proxy for risk appetite, traded 0.2% weaker at $0.74650, but still near the middle of the broad range in place over the past three weeks.

Reserve Bank of Australia Governor Philip Lowe reiterated Thursday that the unemployment rate would need to fall further and hold in the low 4% levels to lift inflation, an outcome not expected until 2024.

The previous day, the central bank took its first step towards stimulus tapering by announcing that a third round of its quantitative easing program would be smaller in scale than the previous two.

Meanwhile, the New Zealand dollar sank below the psychologically important 70 cent mark, sliding 0.4% to $0.69920.

Euro near 3-month low after soft data, dollar awaits Fed’s minutes

The euro staggered near a three-month low against the dollar on Wednesday after disappointing German data raised doubts about the strength of the economic recovery, while the dollar awaited the Federal Reserve’s minutes from its last policy meeting.

The single currency changed hands at $1.1820, having touched a three-month low of $1.1806 on Tuesday. Against the yen, it fell to 130.81 yen, edging near its two-month low of 130.05 set on June 21.

Investor sentiment in Germany, the euro zone’s biggest economy, fell sharply in July, though it remained at a very high level, the ZEW economic research institute reported.

Even more worrying, separate data showed orders for German-made goods posted their sharpest slump in May since the first lockdown in 2020, hurt by weaker demand from countries outside the euro zone.

Other risk-sensitive currencies took a hit after oil prices abruptly plunged as OPEC producers cancelled a meeting when major players were unable to come to an agreement to increase supply.

The Australian dollar traded at $0.7490, giving up gains made on Tuesday after the Reserve Bank of Australia took its first step towards tapering its stimulus.

The RBA announced a third round of its quantitative easing program albeit at a size smaller size than the previous two rounds, while retaining the April 2024 bond for its three-year yield target of 0.1%.

Cautious risk sentiment underpinned the yen, which strengthened to 110.645 yen per dollar, extending its rebound from its 15-month low of 111.64 touched last week.

The yen’s gains came as U.S. bond yields fell to their lowest levels since February after data signaled the service sector expanded at a slower pace.

Yields have fallen in recent weeks also as many speculators who had bet that rising inflation could prompt the Federal Reserve to tighten its policy soon have been forced to bail out of their positions.

Minutes from the Fed’s June policy meeting due later on Wednesday, however, could offer fresh hints on its policy outlook.

“Many people seem to think the Fed will drop hints on tapering in August, and will say in September that it is considered and it will be implemented in December. But I believe the Fed could move earlier than those timelines,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

“The important point is, the Fed did already raise their inflation forecast.”

Elsewhere, cryptocurrencies were in a holding pattern, with bitcoin little changed at $34,066 and ether at $2,308.

Dollar awaits Fed minutes, kiwi aloft on rate expectations

The New Zealand dollar rose on Tuesday after a strong business survey pulled forward rate hike
expectations there to as soon November, while its Australian counterpart crept higher ahead of its own crucial central bank policy meeting later in the day.

The U.S. dollar and other majors were mostly steady as investors wait on the minutes from the Federal Reserve’s meeting in June when it surprised markets with a hawkish shift. They are due to be published on Wednesday.

The euro held at $1.1860, more or less where it left off Friday and the yen rose a tad to 110.86 per dollar. Sterling nudged higher after Britain set plans to end Covid-19 restrictions in a fortnight, and last bought $1.3857.

The kiwi rose as much as 0.4% to a one-week high of $0.7066, briefly breaking above its 200-day moving average, before settling around $0.7055 in morning trade.

The Aussie tacked on 0.2% to $0.7541, though it was capped ahead of the Reserve Bank of Australia (RBA) meeting.

A business survey in New Zealand showed a sharp improvement in confidence, a willingness to raise prices and a record high level of firms facing hiring issues – prompting ASB Bank to pull forward rate hike expectations to just four months away.

“It is very clear that record amounts of monetary stimulus are no longer needed to support the economy and inflation risks are getting too high for comfort,” said ASB senior economist Jane Turner in a note. “We now expect the RBNZ to start lifting the OCR from November this year (previously May 2022).”

Swaps pricing also shifted to point to a roughly 3/4 chance of a November hike which, if it occurred, would put the Reserve Bank of New Zealand on par with the super-hawkish Norges Bank which is alone among G10 banks in forecasting a 2021 hike.

Against the Australian dollar the kiwi hit a one-month high as the forecast of hikes as soon as in four months contrasts with the RBA, which has previously said it doesn’t expect to lift rates until 2024.

There is a possibility that could change on Tuesday, with the central bank flagging it will decide the fate of its bond purchase program and three-year yield target.

Economists expect the three-year yield target — which is set at the cash-rate level of 0.1% — to stay on the April 2024 bond — and for the RBA to adopt a flexible approach to bond purchases.

Elsewhere a sharp rise in oil prices following abandoned talks among producers about output levels pushed exporters’ currencies higher, driving the Norwegian crown up 0.3% overnight and lending support to the Canadian dollar.

On the horizon later in the day — when U.S. markets return from a holiday — is a U.S. services survey and a German sentiment survey.

On Wednesday, the Fed minutes might determine the near-term direction of the dollar as investors look for insight into the thinking behind last month’s hawkish shift in which Fed members projected a start to rate hikes in 2023.

“We still think it’s a bit early for any material detail to be decided about tapering, but these minutes may certainly offer the beginnings of providing at least some sense of what members are thinking,” said Alvin Tan, Asia FX strategist at RBC Capital Markets.

Dollar gains ahead of U.S. payrolls, seen higher short-term

The dollar hit three-month highs on Thursday but traded within narrow ranges as investors looked to Friday’s U.S. nonfarm payrolls report for clues on whether the Federal Reserve will start to reduce monetary stimulus sooner rather than later.

The U.S. dollar index, which measures the greenback against six major counterparts, rose to 92.602, the highest since early April. It last traded up 0.2% at 92.572.

The index in June posted its best monthly performance since November 2016, driven in part by the Federal Open Market Committee’s unexpected hawkish shift at a meeting during the month. Fed forecasts released after the June FOMC meeting penciled in two interest rate hikes by the end of 2023.

Against the yen, the dollar hit a 15-month high of 111.640 yen, and was last up 0.4% at 111.560.

Increased vaccinations that have led to more robust economic activity have helped the U.S. recovery from the pandemic, prompting expectations the Fed could start exiting its ultra-easy policy. That has provided a lift for the dollar.

“The dollar got a justified boost in June based on physical activity taking place across the country because of inoculations,” said Juan Perez, FX strategist and trader at Tempus Inc in Washington.

“The rest of the world simply is not looking that safe, that prepared to move forward,” he added.

Traders are looking to Friday’s U.S. payrolls report for confirmation of the market’s bullish outlook.

Economists polled by Reuters expect a gain of 700,000 jobs last month, compared with 559,000 in May, and an unemployment rate of 5.7% versus 5.8% in the previous month.

“We generally think the U.S. dollar should stay firm into Friday’s U.S. employment reading,” said Ned Rumpeltin, European head of FX strategy at TD Securities in a research note.

“We wonder, however, how aggressive further gains could be from there unless the data validates expectations of a further near-term hawkish shift from the Fed.”

The greenback extended gains earlier on Thursday after data showed U.S. initial jobless claims fell more than expected last week, while layoffs plunged to a 21-year low in June.

The dollar slipped a bit though after a report showing U.S. manufacturing activity grew at just a moderate pace in June, while employment in the sector contracted for the first time in seven months, likely because of rampant shortages of raw materials and labor.

In afternoon trading, the euro was down 0.1% at $1.1843 after earlier dipping as low as

$1.1837 for the first time since April 6. The euro recovered from its lows after data showed euro zone purchasing managers indexes were higher than expected.

The Aussie dollar, seen as a proxy for risk appetite, slid 0.5% to $0.7464, after earlier

hitting its lowest since Dec. 21, as Australia’s major centers of Sydney, Brisbane, Perth and Darwin are all under lockdown.

Dollar hits three-month high ahead of U.S. jobs test

The U.S. dollar hit a fresh three-month high versus other major currencies on Friday, as traders wagered strong U.S. labour data could lift it even further.

The dollar index is on track to gain nearly 1% this week, its fourth weekly rise in five weeks. It hit a high of 92.699 before losing some momentum, and was last broadly flat on the day at 92.582.

The greenback has strengthened broadly since the U.S. Federal Reserve. Federal Reserve surprised markets last month by signalling it could tighten policy earlier than expected to curb inflation.

The U.S. jobs report is due at 1230 GMT and is forecast to show a solid rise of 700,000, with traders braced for any surprises.

“The FX markets have certainly become more sensitive to incoming US economic data,” currency analysts at MUFG said in a note. “That suggests to us that positioning in FX could still be short US dollars which is resulting in this further extension of dollar strength.”

A higher number in the employment report could fuel concerns of tighter Fed policy, analysts said.

“The dollar has started July strongly; a U.S. non-farm payrolls meet or beat today would maintain that momentum,” DBS Bank strategist Philip Wee wrote in a note.

The dollar hit a fresh three-month high versus the euro ahead of the report, edging up a quarter of a percent on the day to $1.18205. It was broadly flat versus the yen and British pound.

“Many people are now arguing (over) whether the dollar has indeed bottomed, because at some point in 2023 the Fed is suggesting that it could be raising interest rates,” Paul Mackel, global head of FX research at HSBC said in an outlook call.

“Also there’s some nervousness whether the dollar’s going to start to behave in a more pro-cyclical manner, that is, if the data is stronger than expected in the U.S. that the dollar really gets more strength from that.”