FX Rate News

After a week of anxious waiting, markets got the high U.S. inflation number they dreaded, then shrugged it off and moved on — leaving the U.S. dollar under pressure and most majors stuck in ranges.

Early in the Asia session the greenback nursed small losses, as traders figured there were enough one-offs in last month’s 0.6% rise in consumer prices to support the Federal Reserve’s insistence that inflation was likely to be transitory.

The dollar bought 109.44 yen and was headed for a small weekly loss. It was also on track for modest weekly losses on the Aussie dollar and British pound, last trading at $0.7752 per Aussie and $1.41825 per pound.

A dovish commitment from the European Central Bank to stick with its elevated tempo of bond buying held the euro in check at $1.2189.

“What we’re seeing is a market that believes in the Fed,” said Chris Weston, head of research at broker Pepperstone in Melbourne, as investors temper worries that the strong recovery in the United States prompts early rate hikes.

“We’re going to get tapering,” he said. “But it’s going to get done a such a snail’s pace.”

The data overnight showed U.S. consumer prices up 5% year-on-year, the sharpest rise in more than a dozen years and core inflation surging 0.7% in a month.

But hefty contributions from short-term rises in airline ticket prices and used cars helped convince traders it was not going to drive interest rates higher any time soon.

“It basically fit the Fed script, that we’d get a burst but it’s going to be temporary,” said Westpac currency analyst Imre Speizer.

“This report is consistent with that, it doesn’t argue against it. I think the market needed something that argued against it to push the U.S. dollar higher.”

The U.S. dollar index fell slightly after the inflation figures were published and last sat at 89.974, down very slightly for the week.

Benchmark 10-year U.S. Treasuries actually rallied to a three-month high in the wake of CPI, as short sellers quit bets on rising yields.

The 10-year yield was last at 1.4434% after dipping to a three-month low of 1.4320% earlier Friday. It was as high as 1.6350% a week earlier.

Focus now turns to the Fed’s meeting next week, although traders now say that there may not be much of a shift in rhetoric which has played down the need to taper stimulus.

A plan for reducing bond buying is expected to be announced in August or September a Reuters poll of economists found, but it isn’t forecast to begin until next year.

The South Korean won firmed 0.2% to 1,110.08 per dollar after the central bank governor hinted at normalizing policy, in an advance copy of a speech to be delivered later on Friday.

Indonesia’s rupiah gained about 0.4% to 14,187 per dollar as lower U.S. Treasury yields boosted the attraction of Indonesian bonds.

Cryptocurrencies looked to close out the week on a stronger footing, with bitcoin seemingly well supported above $35,000 despite more talk of global regulatory scrutiny.

The digital token last traded at $37,163.52 and on track for a 3.5% weekly advance.

The dollar continued to hover near a five-month low versus major peers on Thursday as investors looked to key U.S. inflation data and a European Central Bank meeting later in the day to potentially set the direction for currency markets.

Investors have adopted a wait-and-see attitude all week, sucking volatility from the market and leaving major currencies mostly range-bound.

The dollar index has fluctuated narrowly around the psychologically important 90 level, and was last at 90.137.

The euro rose to a one-week high at $1.2218 on Wednesday only to finish little changed, and was essentially flat at $1.2178 in Asia.

The yen traded at 109.62 per dollar, also little changed from Wednesday and near the middle of the 109.19-110.325 range of the past two weeks.

Deutsche Bank’s Currency Volatility Index languished at its lowest level since February 2020.

The U.S. Labor Department’s consumer prices data has been much anticipated after last month’s report showed consumer prices increased by the most in nearly 12 years in April.

That has stoked bets that higher prices could last longer than some anticipate, potentially calling into question the Federal Reserve’s insistence that current inflation pressures are transitory and monetary stimulus should stay in place for some time yet.

Economists polled by Reuters estimated the CPI advanced 0.4% in May.

While the greenback has kept to tight ranges in the run-up to the report, benchmark 10-year Treasury yields — which helped drive the dollar index to a multi-year high earlier this year — has taken a sizeable step lower in the past week and was at 1.4874% in Asia from as high as 1.6350% on Friday.

“It feels like the balance of risk is tilted to the upside on U.S. CPI versus the consensus, which would favour a sell-off in Treasuries – (and thus) higher yields – and subsequently a stronger USD,” Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a note to clients.

“Bonds seem overbought.”

With the ECB, investors will be watching for any clues of an imminent slowdown to its bond-buying program.

While the ECB is widely expected to keep policy settings steady, the euro could be sensitive to changes in the bank’s economic forecasts or any signal that the pace of bond buying could be reduced in months ahead.

In crypto markets, bitcoin held gains from its biggest rally in four months on Wednesday, when it jumped nearly 12%. It last traded little changed at $37,097.02, after rebounding from a three-week low of $31,025 hit on Tuesday when signs of institutional investor caution and regulatory attention drove selling.

The U.S. dollar was subdued on Tuesday as investors looked to U.S. inflation data due later in the week after softer-than-expected jobs data quelled expectations of an early tapering in the Federal Reserve’s stimulus.

The euro fetched $1.21915, bouncing back from its three-week low of $1.2104 set on Friday while the dollar eased to 109.26 yen, losing steam after having hit a two-month high of 110.325 late last week.

The dollar’s index against a basket of six major currencies stood at 90.021, not far from 89.533, a 4 1/2-month low touched late last month.

“It’s not that the payrolls numbers were weak. But because so much expectation had been build up in advance, the dollar suffered a bit of setback,” said Shinichiro Kadota, senior currency strategist at Barclays.

Friday’s jobs data, which showed U.S. non-farm payrolls increasing by 559,000 in May, fell 90,000 jobs short of expectations.

The data helped to pin down U.S. bond yields near their recent lows, weighing on the dollar, while investors now looked to consumer price data on Thursday for fresh direction.

Many investors now expect the Fed to unveil a plan to reduce its bond purchase later this year, and actual tapering to start early next year.

The British pound hardly budged at $1.4169 while the Australian dollar was unchanged at $0.7753, both stuck in ranges seen over the past couple of months.

With recent trading ranges tight, implied volatilities on both currencies have dropped to their lowest levels since early 2020, before markets were pummeled by the COVID-19 pandemic.

Elsewhere, the Mexican peso held firm at 19.832 to the U.S. dollar, near its highest level since late January, after midterm elections confirmed President Andres Manuel Lopez Obrador’s MORENA party as the strongest force in the country, but with a reduced majority.

In contrast, the Peruvian sol tumbled to an all-time low of 3.9367 per dollar as socialist Pedro Castillo edged ahead of right-wing rival Keiko Fujimori in the country’s presidential election vote.

Cryptocurrencies were also little moved. Bitcoin traded flat at $33,564, while ether stood at $2,581.

The dollar gave up gains from early on Friday as traders tidied positions ahead of month-end and a holiday weekend after seeing new economic data confirm expectations about U.S. inflation and the recovery from the COVID-19 pandemic.

The dollar index of major currencies rose as much as 0.4% during the day in a sharp rebound from 4-1/2 month lows plumbed on Tuesday before it fell back to flat for the day and the week at 89.99.

Ending with little change was a break from the down trend since March that had taken 3% from the dollar’s value as other major economies began to catch up with vaccination rates in the United States. At the same time, central banks in some other countries had appeared likely to move more quickly than the U.S. Federal Reserve to back away from easy money policies and let interest rates rise.

The euro was up a bare 0.05% at $1.22 on Friday afternoon, compared with a four-month high of $1.2266 earlier in the week.

The British pound was flat at $1.4199, continuing its recent struggle to stay above $1.42..

On Monday, the United States and Britain have public holidays.

The U.S. economic data had been seen as the big scheduled news of the week, but it did not move bond and stock markets much when it was released in the morning.

The data showed that consumer prices increased in April far beyond the Federal Reserve’s 2% annual rate target.

The inflation readings had been widely anticipated and were not expected to have an impact on policy from the Fed, which has viewed recent price increases as adjustments for the reopening of the economy.

The next big event for the markets is the Fed’s monetary policy meeting on June 15 and 16, which could provide clues to when U.S. interest rates will increase.

Fed officials could show projections for stronger economic growth. That would point toward the central bank tapering its purchases of bonds and allowing longer-term interest rates to rise, which would support the dollar, said Joseph Trevisani, senior analyst at FXStreet.com.

“The Fed is trying to prepare the markets for the inevitability of tapering,” Trevisani said.

The major currency that would most likely lose against the dollar is the Japanese yen, Trevisani said, citing trouble with Japan’s recovery from the pandemic compared with Europe and Britain.

The dollar gained against the yen early on Friday and hit a seven-week high before easing to show little change on the day. The dollar last traded around 109.77 yen after reaching as high as 110.2.

Japan has seen a rise in unemployment, falling consumer prices and government moves to extend emergency restrictions in Tokyo and other areas because of the COVID-19 pandemic.

China’s onshore yuan appreciated to as few as 6.358 per dollar, a new three-year high. The dollar was last trading at 6.3616 yuan, down 0.15% for the day.

Kenneth Broux, FX strategist at Societe Generale, said the fact that the yuan has been stronger than 6.40 for three days could be a turning point in Chinese policy that would be positive for the global economy.

“Nobody thought that the central bank would allow the yuan to strengthen beyond 6.40, and they have,” Broux added.

The New Zealand dollar, which this week had jumped on the prospect of an interest rate hike by September 2022, fell as much as 1% against the greenback early in the day..

In cryptocurrencies, bitcoin was down about 6% at $36,174 in the morning in New York, while ether was down 8% at around $2,510.

The dollar was pinned near milestone lows on Friday, and headed for a weekly loss, as traders’ initial concerns at taper talk in Federal Reserve minutes ebbed — with actual tapering seeming distant — while pandemic recovery boosted other currencies.

On Wednesday, minutes from the April Fed meeting noted some committee members think that if the economy keeps improving, it might be appropriate, at upcoming meetings, to “begin discussing a plan for adjusting the pace of asset purchases”.

But after bouncing off a four-month low on the euro as the mere mention of tapering policy prompted fears of early rate rises, the dollar has dropped back and, at $1.2225 per euro, is again testing major support around $1.2345.

The dollar index is at 89.795, just a fraction above a three-month low of 89.686 struck before the Fed minutes were published. The index, which measures the greenback against six major currencies, is down about 0.6% for the week so far.

Against the yen the dollar was steady in Asia on Friday at 108.84, having dropped about 0.5% on the week. Cryptocurrencies have also staged a comeback, with bitcoin at $41,171 sitting some 37% above Wednesday’s low.

“It has been just over 24 hours since markets got spooked by the prospect of the U.S. Fed tapering its asset purchases, but having proverbially slept on it, the mood seems less sour today,” ANZ analysts said in a note. “Which seems reasonable – it’s not like the Fed is on the brink of wanting to actually act.”

A future discussion on tapering is also already reflected in the pricing of U.S. Treasuries and in money markets after the heavy selling of government bonds through February and March, limiting further dollar gains from the Fed minutes.

Benchmark 10-year Treasury yields fell to 1.6340% overnight and have range-traded between roughly 1.5% and 1.7% for two months, after jumping by more than 80 basis points in the first quarter of 2021. Fed Funds futures price the first full rate hike by January 2023.

“The world was, is and will remain awash with cheap dollars,” said Societe Generale strategist Kit Juckes.

“As long as the Fed is talking about talking about tapering, Treasuries are likely to remain stuck in their range and the dollar’s path of least resistance is to go on falling, albeit slowly.”

Elsewhere among major currencies, moves were slight as traders awaited retail sales data in Australia and Purchasing Managers’ Index figures across Europe.

The Australian and New Zealand dollars, which are near multi-year highs as lofty commodity prices and strong pandemic recoveries provide support, looked to close the week broadly steady.

The kiwi last bought $0.7198 and the Aussie $0.7773.

Sterling is perched close to its highest since 2018 as high vaccination rates support a stronger-than-expected economic recovery. Analysts said retail sales figures, as well as May PMIs later on Friday might deliver a further boost.

Sterling last traded steady at $1.4185.