FX Rate News

The dollar hit 2021 highs against sterling and the euro on Thursday, while the yen was smarting from its sharpest drubbing in a month, after the hottest U.S. inflation reading in a generation fanned bets on rate hikes.

U.S. consumer prices grew at their fastest annual pace since 1990 last month, data showed, and traders think the Federal Reserve could respond by lifting interest rates faster than peers in Europe and Japan.

The euro was pummeled, as the European Central Bank is seen lagging on policy tightening, and it slipped further to $1.1465 on Thursday, its lowest since July 2020. It is without major chart support until around $1.12.

Sterling was also marginally down at a fresh 11-month low on Thursday of $1.3393. The yen extended a sharp reversal of recent gains to 114.15 per dollar and the Australian and New Zealand dollars made one-month troughs.

“The market is still conferring a degree of credibility on the Fed, that they are not going to allow very high inflation to persist indefinitely,” said National Australia Bank’s head of FX strategy, Ray Attrill.

Even if other central banks are eyeing similar moves, a dollar index move above 95 might prompt investors to get out of the way of a rising greenback, he added.

“It’s quite a big level technically and if we can break up through that then there will be more people throwing in the towel.” The index ticked up to 95.002 on Thursday.

Emerging markets currencies have also suffered from the dollar’s broad rise, with MSCI’s EM currencies index making its sharpest drop in two months.

The surge in Treasury yields, which rise when prices fall, has opened up the difference between five-year U.S. yields and yields at the same tenor in Japan and Germany to their widest – in favor of Treasuries – since early 2020.

Elsewhere on Thursday, Japanese wholesale inflation hit a four-decade high.

A jobs report in Australia showed an unexpected rise in unemployment, though the timing of the report — in the midst of staggered lifting of pandemic lockdowns of big cities – made the figures difficult to interpret.

The Australian and New Zealand dollars nevertheless slipped, with the Aussie down 0.4% at a one-month low of $0.7298 and the kiwi down 0.3% at $0.7038.

Further dollar gains likely depend on clues about the Fed’s thinking, and on whether the inflation jump – which also sparked selling in stock markets – puts a broader weight on the mood.

“From an FX standpoint we are in a stand-off,” said Deutsche Bank strategist Alan Ruskin.

“On the dollar we have the classic dilemma – if Fed won’t respond to high inflation it is dollar negative; if the Fed brings forward tightening it is USD positive. Right now the dollar is broadly stuck between these two worlds.”

British growth data is due later in the day.

The dollar made a steady start to the week on Monday but was kept below Friday peaks, as currency traders seek a path between markets’ volatile interest rate projections and central bankers vowing to keep rates low even as inflation surges.

Figures due Wednesday are expected to show U.S. consumer price growth running hot at 5.8% year-on-year, the next big test of faith in the Federal Reserve’s insistence it will be patient with interest rate hikes.

In early Asia trade, the dollar was marginally higher against the yen and crept from a one-week low to 113.49 yen.
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After briefly touching a 15-month top of $1.15135 on the euro in the wake of strong U.S. labor data on Friday, the greenback steadied at $1.1566 per euro.

Sterling, which was walloped when the Bank of England surprised traders by holding rates steady last week, fell to a five-week low of $1.3425 on Friday, before bouncing to hold at $1.3487 on Monday.

The Bank of England’s surprise triggered a sharp reversal late last week in what had become quite aggressive bets on imminent rate hikes in Britain and globally, while stocks have meandered higher through the maelstrom in bond markets.

“Central banks have distorted a whole lot of markets, pumping up the equity market and pumping up the bond market,” said Jason Wong, a strategist at Bank of New Zealand in Wellington.

“Currencies are sort of in the middle of all that, wondering what the hell’s going on,” he said, with the market seemingly in a holding pattern but with risks building up, especially in China where a slowing economy brings global implications.

The risk-sensitive Australian and New Zealand dollars struggled to make much headway in early trade, with the Aussie pinned just below $0.74 and the New Zealand dollar around $0.7108.

“AUD/USD risks remain skewed to the downside this week in our view,” said Kim Mundy, an analyst at Commonwealth Bank of Australia, especially if U.S. inflation data is strong or if Australian employment data on Thursday is particularly weak.

“A dip towards $0.7300 is possible,” she said.

Elsewhere, weekend data showed Chinese exports unexpectedly strong, but imports unexpectedly soft in another indicator of underwhelming demand, especially as China tightens movement restrictions to keep a lid on Covid-19.

The Communist Party begins a meeting on Monday which is expected to pass a resolution in praise of President Xi Jinping and lay the groundwork for a third term of his leadership.

Traders are also looking ahead to Chinese producer and consumer price data due on Wednesday, with annual producer price growth seen surging to 12% in perhaps a harbinger of further price pressure to come through global supply chains.

The Chinese yuan was marginally weaker in early trade at 6.3951 per dollar. The U.S. dollar index was flat at 94.225, putting it roughly in the top half of a range it has traded for a little more than a month.

The dollar languished near its weakest level in a month against major peers on Friday, hurt by a stronger euro as traders bet on earlier European interest rate hikes and as an equity rally sapped demand for safer assets.

New Zealand’s dollar sagged amid a slide in consumer confidence, while cryptocurrency ether climbed to a record high.

The dollar index, which measures the currency against six main rivals including the euro, was little changed at 93.354, close to Thursday’s low at 93.277 — a level not seen since Sept. 27.
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The euro was largely flat at $1.16855 after rising as high as $1.1692 overnight for the first time since Sept. 28.

Against the yen, another traditional safe haven, the dollar was mostly unchanged at 113.50, continuing to ease back gradually from the almost three-year high of 114.695 reached last week.

An index of global shares rose to the cusp of a record peak this week, powered by an earnings-driven rally to consecutive record highs on Wall Street, including overnight.

The euro was propelled on Thursday after comments by European Central Bank President Christine Lagarde were interpreted in some quarters as not going far enough in affirming the central bank’s dovish stance.

Foreign-exchange markets have become volatile around central bank activity. Big moves began Wednesday with hawkish comments from the Bank of Canada, and were followed on Thursday with an action by the Reserve Bank of Australia and the ECB’s remarks — all ahead of meetings next week of the U.S. Federal Reserve and the Bank of England.

The Fed is widely expected to begin to taper stimulus from next month, with interest rate lift-off following next year.

Lagarde’s “pushback was not forceful enough,” opening the way for the euro to test $1.1680 in the near term, TD Securities strategists wrote in a note.

However, “extrapolating (euro strength) beyond that seems like a big ask a week ahead of the Fed’s meeting where taper will be announced,” they said.

Traders will have their eyes on economic gauges from both regions later in the day, with Europe seeing a preliminary reading of the consumer price index, while the U.S. gets personal spending and income data.

Elsewhere, sterling was almost flat at $.1.37925 as it continued to fluctuate near a one-month high reached last week.

The pound has been buffeted recently by speculation over whether the Bank of England would proceed with an interest rate hike at its meeting next week.

The Australian dollar was largely unchanged at $0.75425, after reaching the highest since early July at $0.75555 in the previous session.

That uptick was fueled when the RBA declined to buy a government bond at the heart of its stimulus program, fanning speculation the central bank will allow rates to rise earlier than expected. The central bank again resisted buying the key bond earlier on Friday.

The New Zealand dollar fell 0.3% to $0.71795 after a gauge of consumer confidence dipped sharply in October.

In cryptocurrencies, ether rose to a record $4,400, while bigger rival bitcoin also gained to trade around $62,000, but down from the record $67,016.50 reached last week.

The dollar inched higher against the safe-haven yen while easing a touch against riskier currencies on Tuesday as solid company earnings and a glimmer of improvement in U.S.-China trade ties lifted sentiment, while rates expectations weighed on the euro.

The greenback was last up 0.2% at 113.93 yen and was holding steady against the euro at $1.1599. Moves were slight as traders eye central bank meetings in Europe, Japan and Canada this week and data releases in Australia and the United States.

China’s Vice Premier Liu He and U.S. Treasury Secretary Janet Yellen held a video call which readouts from both sides suggested was at least not acrimonious.

Meanwhile earnings have driven U.S. stock markets to fresh peaks and car-maker and mood barometer Tesla to a valuation above $1 trillion.

The risk-sensitive Australian dollar rose about 0.3% and poked past 75 U.S. cents to $0.7513, China’s yuan was firm near a four-month high at 6.3845 per dollar and the South Korean won hit a seven-week peak.

“The dollar has been reversing lower because of a more risk- on market, and that’s due to earnings coming in better than expected,” said Bank of Singapore analyst Moh Siong Sim, while investors await data and central bank meetings for direction.

The U.S. dollar index held at 93.856 — in between a one-year high of 94.563 hit earlier in the month and a one-month low of 93.483 made on Monday. Analysts expect it might stay there through a slew of central bank meetings in coming days.

“The dollar looks to be finding its feet in the mid-93s,” analysts at Westpac said in a note, as focus turns first to U.S. growth data on Wednesday and then to the European Central Bank’s meeting on Thursday.

Data and policy

Anticipation of the ECB pushing back on market inflation forecasts — as well as a soft German sentiment survey on Monday — have dragged on the euro ahead of Thursday.

The ECB will likely underscore its dovish guidance, while U.S. GDP will show the economy’s rebound stalling, Westpac’s analysts said, though the scene remains set for the Federal Reserve to announce a reduction in bond purchases next week.

“All told that should keep short-term yield spreads trending in the dollar’s favour and leave the dollar with a bid tone.”

Central bank meetings in Japan and Canada are also scheduled this week and rising inflation in Canada has increased pressure on policymakers to pull forward rate hikes. Traders are watching Wednesday’s meeting for any hawkish clues.

The Canadian dollar stands at C$1.2383 per dollar, having scaled a four-month peak last week.

No changes are expected from the Bank of Japan, although Reuters has reported that policymakers are discussing an end to a COVID-19 loan scheme.

Australian quarterly inflation data due on Wednesday is also likely to set the tone in a tussle between rates markets and the resolutely dovish Reserve Bank of Australia (RBA).

Economists expect growth in Australia’s trimmed mean consumer prices, the central bank’s preferred measure, to have accelerated to an annual pace of 1.8% in the September quarter from 1.6% in the preceding three months.

Beyond Friday, the Fed, the RBA and the Bank of England meet next week with markets having priced a roughly 60% chance that the Bank of England raises interest rates to head off inflation.

Sterling has been firming at the prospect of higher rates and was last steady at $1.3765. The New Zealand dollar rose 0.1% to $0.7174.

U.S. bonds drove currencies on Wednesday, with a rise in long-term rates pushing the dollar to an almost four-year high on the yen, but a decline in shorter-dated yields putting it on the back foot against most other major peers.

The dollar and yen were also under pressure from a global equity rally that sapped demand for assets regarded as safe havens.

The dollar climbed as high as 114.585 yen for the first time since November 2017, with benchmark 10-year Treasury yields touching a fresh five-month high at 1.6630% in Asia. Higher long-term U.S. yields increase the allure of those assets to Japanese investors.

However, two-year Treasury yields hovered around 0.4050% after retreating sharply overnight from Monday’s 19-month high of 0.4480%, signaling a scaling back of bets for early Federal Reserve interest rate hikes.

That contrasted to a rise in wagers this week for faster rate increases in the U.K. and New Zealand, which also pulled up expectations in neighbors like the euro zone and Australia.

“Risk sentiment remains in the ascendancy,” while “a fall-back in front-end U.S. yields, so symptomatic of a slight paring back in expectations for when Fed rates ‘lift-off’ might occur,” dealt the dollar a double-whammy, Ray Attrill, head of FX strategy at National Australia Bank in Sydney, wrote in a research note.

At the same time, markets are coming to “the — highly belated — realization that whether the Fed raises (its policy) rate in 2022 or not until later, other central banks are getting in ahead of them … with the Bank of England likely next cab off the rank as early as next month,” Attrill said.

The dollar index — which measures the greenback versus six rivals, including the yen — was little changed at 93.822 from Tuesday, when it lost about 0.2% and dipped to the lowest this month at 93.501.

The U.S. economic outlook got a little less rosy on Tuesday after data showed that U.S. homebuilding unexpectedly fell in September and permits dropped to a one-year low amid acute shortages of raw materials and labor, supporting expectations that economic growth slowed sharply in the third quarter.

Richmond Fed President Thomas Barkin said on Tuesday that U.S. labor shortages may outlast the coronavirus pandemic and limit overall economic growth unless the country comes up with better education, health and childcare policies to boost the number of people willing and able to work.

The euro was about flat at $1.16335 from Tuesday, when it jumped as high as $1.1670 for the first time since Sept. 29.

Sterling was little changed at $1.3793 after touching a one-month peak of $1.3834 in the previous session.

The risk-sensitive Australian dollar traded slightly weaker at $0.74725, but remained close to Tuesday’s more than three-month top at $0.74855.

New Zealand’s kiwi dollar was little changed at $0.71565, near the highest since June 11 at $0.7172, reached overnight.

In the equities space, Asia-Pacific stocks extended a global rally on Wednesday, with an index of regional shares adding 0.33%.

“The move in equities has seen the USD and JPY shunned,” Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a client note.

“It’s really just pick a JPY cross and see the ‘rip your face off’ move,” he said. “This is a momentum play here and timing the pullback in JPY crosses is key, but it doesn’t feel like we’re going to see a rush to cover JPY shorts anytime soon in this dynamic.”

U.S. bonds drove currencies on Wednesday, with a rise in long-term rates pushing the dollar to an almost four-year high on the yen, but a decline in shorter-dated yields putting it on the back foot against most other major peers.

The dollar and yen were also under pressure from a global equity rally that sapped demand for assets regarded as safe havens.

The dollar climbed as high as 114.585 yen for the first time since November 2017, with benchmark 10-year Treasury yields touching a fresh five-month high at 1.6630% in Asia. Higher long-term U.S. yields increase the allure of those assets to Japanese investors.

However, two-year Treasury yields hovered around 0.4050% after retreating sharply overnight from Monday’s 19-month high of 0.4480%, signaling a scaling back of bets for early Federal Reserve interest rate hikes.

That contrasted to a rise in wagers this week for faster rate increases in the U.K. and New Zealand, which also pulled up expectations in neighbors like the euro zone and Australia.

“Risk sentiment remains in the ascendancy,” while “a fall-back in front-end U.S. yields, so symptomatic of a slight paring back in expectations for when Fed rates ‘lift-off’ might occur,” dealt the dollar a double-whammy, Ray Attrill, head of FX strategy at National Australia Bank in Sydney, wrote in a research note.

At the same time, markets are coming to “the — highly belated — realization that whether the Fed raises (its policy) rate in 2022 or not until later, other central banks are getting in ahead of them … with the Bank of England likely next cab off the rank as early as next month,” Attrill said.

The dollar index — which measures the greenback versus six rivals, including the yen — was little changed at 93.822 from Tuesday, when it lost about 0.2% and dipped to the lowest this month at 93.501.

The U.S. economic outlook got a little less rosy on Tuesday after data showed that U.S. homebuilding unexpectedly fell in September and permits dropped to a one-year low amid acute shortages of raw materials and labor, supporting expectations that economic growth slowed sharply in the third quarter.

Richmond Fed President Thomas Barkin said on Tuesday that U.S. labor shortages may outlast the coronavirus pandemic and limit overall economic growth unless the country comes up with better education, health and childcare policies to boost the number of people willing and able to work.

The euro was about flat at $1.16335 from Tuesday, when it jumped as high as $1.1670 for the first time since Sept. 29.

Sterling was little changed at $1.3793 after touching a one-month peak of $1.3834 in the previous session.

The risk-sensitive Australian dollar traded slightly weaker at $0.74725, but remained close to Tuesday’s more than three-month top at $0.74855.

New Zealand’s kiwi dollar was little changed at $0.71565, near the highest since June 11 at $0.7172, reached overnight.

In the equities space, Asia-Pacific stocks extended a global rally on Wednesday, with an index of regional shares adding 0.33%.

“The move in equities has seen the USD and JPY shunned,” Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a client note.

“It’s really just pick a JPY cross and see the ‘rip your face off’ move,” he said. “This is a momentum play here and timing the pullback in JPY crosses is key, but it doesn’t feel like we’re going to see a rush to cover JPY shorts anytime soon in this dynamic.”

The dollar languished near the bottom of its recent range against major peers on Tuesday, knocked back by weak U.S. factory data overnight and on market wagers of faster normalization of monetary policy in other countries.

The dollar index, which measures the greenback against six peers, weakened 0.05% to 93.894 from Monday. It has oscillated for the past three weeks between 93.671 and the one-year high of 94.563, reached last Tuesday.

Over the past week though, it has trended lower, with a tapering of Federal Reserve stimulus as early as next month already priced in, along with a first interest-rate increase next year.

A recovery in risk sentiment has also weighed on the safe-haven U.S. currency.

Elsewhere, Bank of England Governor Andrew Bailey sent a fresh signal for early U.K. rate hikes by saying on Sunday that the central bank will “have to act” to counter rising inflation risks. In New Zealand, bets for faster policy normalization were stoked on Monday by data showing the fastest consumer-price inflation in more than a decade.

The U.K. and New Zealand led a rise in short-term bond yields globally, with rates in Europe and Australia climbing comparatively more than those in the U.S., pressuring the dollar.

“The sense that ‘transitory’ inflation will last longer than previously thought has been the main catalyst” as “the market re-calibrated rate hike expectations in most jurisdictions,” Westpac strategists wrote in a research note.

However, the U.S. is likely to be insulated by energy market bottleneck that is “casting an ongoing cloud over rebound prospects in Europe and China,” which “should leave yield spreads at the front end continuing to drift in the USD’s favour,” they said, adding that pullbacks in the dollar index should be limited to 93.70.

However, Westpac remains bullish on New Zealand’s kiwi dollar — which isn’t part of the dollar index — targeting a climb to $0.74 by year-end, and recommending buying any dips to $0.6985.

The kiwi rose 0.11% to $0.7093, edging back toward a one-month high of $0.7105 reached on Monday.

The Aussie dollar gained 0.09% to $0.74225, approaching a more than one-month high of $0.7440 touched at the end of last week, even after minutes of the Reserve Bank of Australia’s September meeting showed on Tuesday that policymakers are concerned tighter policy could harm the labor market.

Sterling added 0.13% to $1.37455, nearing Friday’s one-month peak at $1.3773.

The euro advanced 0.09% to $1.16205, approaching the top of this month’s trading range.

Against the safe-haven yen, the dollar was little changed at 114.275, but not far from the almost three-year high of 114.47 touched on Friday.

U.S. manufacturing output was hurt as an ongoing global shortage of semiconductors depressed motor vehicle output, providing further evidence that supply constraints were hampering economic growth.

“Our strong USD forecast published in early July reflected — among other things — U.S. economic outperformance, but the USD’s drivers may be changing,” Commonwealth Bank of Australia strategist Joseph Capurso wrote in a client note.

“The spike in global inflation and interest rates may support the USD as a safe haven if short-term interest rates price in a global monetary tightening cycle that it so strong it forces equities to correct lower,” with evidence of that scenario likely seen in a decline in USD/JPY and AUD/JPY, he said.

The dollar made a wobbly start to the week on Monday with the kiwi and sterling edging higher after a red-hot inflation readout in New Zealand and hawkish remarks from Britain’s central bank chief that put rate rises in investors’ sights.

The dollar index has now slipped about 0.6% from last week’s 2021 highs as investors figure that while price pressures might pull forward hikes by the Federal Reserve, other central banks may need to be more aggressive over the tightening cycle.

New Zealand reported its biggest quarterly jump in consumer prices in a decade on Monday. Bank of England Governor Andrew Bailey said on Sunday that surging energy prices would prolong a pulse in inflation and policymakers “will have to act” if they see risks.

The data lifted the kiwi by about 0.3% to a one-month high of $0.7105. Sterling rose 0.1% to $1.3762, just shy of Friday’s one-month high of $1.3773.

The Australian dollar was also near its highest in six weeks and oscillated around $0.7413. Oil futures stood at fresh three-year highs and stoked expectations that even more price rises are heading along global supply chains.

“The rest of the world is probably outpacing the U.S. in inflation, for now, and it puts more pressure on those central banks than the U.S. one,” said Westpac currency analyst Imre Speizer.

In New Zealand, he said, the surprise leap in prices would only reinforce the need for the Reserve Bank of New Zealand to stay the course on its hiking trajectory, he added.

The dollar made small gains on the euro and was steady on the yen, last trading for $1.1587 per euro and buying 114.22 yen.

Bitcoin, vaunted as an inflation hedge and riding high on hopes for U.S. approval of a futures-based exchange traded fund that would funnel cash into the sector, hovered just shy of its record peak of $64,895. It last bought $62,233.

Fed funds futures are now fully pricing U.S. rate hikes to begin next September as inflation pressures rise, however a relatively shallow cycle is expected, with pricing suggesting rates could linger at 1.5% through 2026.

Swaps pricing suggests swifter and more prolonged action is now more likely elsewhere — with an almost 30% chance of a Bank of England rate hike this year and nearly 80 basis points of hikes priced through 2022.

Even in Australia, where the central bank has insisted it expects to keep rates on hold until 2024, swaps are pricing hikes to start in mid 2022 and for 100 bps of hikes before 2024 even begins.

Chinese gross domestic product data is due on Monday, with analysts expecting a slowdown, and there is an intense focus on China’s credit markets where a slew of property developers have coupon payments due.

The yuan was firm in offshore trade at 6.4324 per dollar.