The Dollar Holds Steady as Strong Trend Persists
By Gertrude Chavez-Dreyfuss and Samuel Indyk
The dollar remained relatively unchanged on Friday, consolidating its gains from the week. Despite a slight pullback, the dollar index is on track for eight consecutive weeks of gains, the longest streak since 2014. The underlying strong trend of the currency is supported by stable consumer and labor markets, keeping the possibility of another rate increase this year on the table.
“This week the market has been a little more nervy than usual on a number of fronts and that has lent to dollar strength,” said Amo Sahota, director of FX at consulting firm Klarity FX in San Francisco.
He cited the continued escalation of the spat between the U.S. and China over the latter’s iPhone restrictions, which have put Apple in the spotlight. There is also the narrative that the Federal Reserve will keep interest rates higher for longer as the battle for inflation is still playing out.
“There’s a lot of reasoning to ask whether dollar strength is going too far,” Sahota said. “That may be, but in an environment where things could get nervy, the dollar always looks attractive” because of its yield advantage over other currencies due to the spate of Fed rate increases.
Meanwhile, China’s onshore yuan ended its domestic session at its weakest level since 2007, facing capital outflow pressures and a widening yield gap with major economies.
In afternoon trading, the dollar index, which measures the greenback against six major peers, was flat at 105.05. It hit a six-month peak of 105.15 the previous session. The index is up 0.7% for the week.
“The market is quite long dollars already and the incremental upside has been small. So I think the market is having a hard time pushing the dollar significantly higher,” said Vassili Serebriakov, FX strategist at UBS in New York.
The euro, the largest component in the dollar index, is on track for eight straight weeks of losses, down 0.7% for the week. The euro was last flat on the day at $1.0699, after hitting a three-month low on Thursday.
Data released this week showed unexpected gains in the U.S. services sector in August, while jobless claims hit their lowest level since February. In contrast, industrial production in Germany fell slightly more than expected in July.
The chances of a Fed rate hike at the November meeting are still above 40%, although the market expects interest rates to remain steady later this month.
Sterling moved away from its three-month low on Thursday and was last trading at $1.2459, down 0.1% for the week.
The Canadian dollar strengthened against the greenback after Canada added 39,900 jobs last month, surpassing the median forecast of 15,000. The unemployment rate remained at 5.5%. The U.S. dollar was last down 0.3% against the Canadian currency.
In the Doldrums
The onshore Chinese yuan touched its weakest level against the dollar since December 2007, while its offshore counterpart sank to a 10-month low. China’s currency has been steadily depreciating since February due to the faltering post-pandemic economic recovery and widening yield gap with other economies, particularly the United States.
The struggling yen was also in focus, with the Japanese unit weakening against the dollar. Japanese Finance Minister Shunichi Suzuki warned against rapid currency moves and stated that authorities wouldn’t rule out any options to counter excessive swings.
Reporting by Samuel Indyk in London and Gertrude Chavez-Dreyfuss in New York; Additional reporting by Rae Wee in Singapore; Editing by Shri Navaratnam, Gerry Doyle, Angus MacSwan, and Mark Heinrich
How might trade tensions and emerging market pressures impact the dollar’s trajectory in the future?
Ignificantly higher,” said Eddie Cheung, a currency strategist at Standard Chartered in Hong Kong.
Investors are closely watching the Federal Reserve’s next move in terms of interest rate hikes. The Fed has already raised rates three times this year, and many market participants believe there will be at least one more hike in December.
However, some analysts argue that the recent strong trend in the dollar may be reaching its limit. The ongoing trade tensions between the U.S. and China could potentially have a negative impact on the dollar’s strength, as these tensions have the potential to weigh on global economic growth. Additionally, there are concerns over the impact of rising interest rates on emerging markets, which could lead to capital outflows and put pressure on the dollar.
“If the U.S.-China trade dispute escalates further or if emerging markets continue to face external pressure, the dollar may face headwinds in the coming months,” said Mark Williams, chief Asia economist at Capital Economics.
Nevertheless, for the time being, the dollar’s strong trend appears to be intact. The currency’s yield advantage over other major currencies, coupled with stable economic fundamentals in the U.S., continue to attract investors looking for safe-haven assets amidst uncertain global conditions.
As the dollar holds steady, investors are also keeping a close eye on geopolitical developments and upcoming economic data releases. Any unexpected surprises in these areas could potentially impact the dollar’s performance in the coming weeks.
In conclusion, the dollar’s strong trend persists, supported by stable consumer and labor markets as well as the prospect of another interest rate increase this year. However, risks such as trade tensions and emerging market pressures should not be overlooked, as they have the potential to alter the currency’s trajectory in the future. As such, investors should remain vigilant and closely monitor market developments in order to make informed decisions regarding the dollar and other currencies.
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