US dollar set for weekly rise after shift in global rate outlook

THE US dollar headed for a second week of gains on Friday (Mar 22), with a slight rate hike in Japan unable to halt its rise and a surprise cut in Switzerland highlighting the gap in interest rate policy between the Federal Reserve and other central banks.

The week marked a shift in global monetary policy as the Swiss National Bank (SNB) and central banks in developing countries cut rates or indicated their intention to do so, with June the likely moment for the European Central Bank to move.

The US dollar rose against all G10 currencies except the yen, as the relatively strong US economy and high interest rates draw investment flows. But the Swiss rate cut, the first by a major central bank in Europe, marked a definitive shift.

“We had a somewhat surprising cut from the SNB this week,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto. “People have been extrapolating, certainly from a signalling point of view, what that might mean for other central banks in Europe.”

The Fed left its overnight rate on hold between 5.25 to 5.5 per cent and stuck with projections for three cuts by year’s end. But it also said it would not start moving until it had more confidence that inflation was sustainably falling towards its 2 per cent target.

About 83 basis points of cuts are priced in for this year – much lower than the 160 or so at the start of the year.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The Swiss franc, the best performing G10 currency of 2023, has lost about 1.5 per cent in value against the US dollar this week and about 6.6 per cent so far this year.

The US dollar index, a measure of the US currency against six major trading partners, rose 0.26 per cent while the US dollar weakened 0.26 per cent against the Japanese yen at 151.22 per US dollar.

The US dollar is up about 1.4 per cent this week versus the yen and neared levels that prompted Japanese intervention in 2022.

Euro/yen hit its highest since 2008 this week at 165.37 and the Aussie broke above 100 yen for the first time since 2014.

With the US dollar in the ascendant, the euro hit a three-week low. It was last trading down 0.3 per cent at US$1.0829.

The Bank of Japan announced an historic shift out of negative short-term rates and longer-run yield caps, but it was so well telegraphed that the yen fell on the news and was last at 151.17 per US dollar.

“The stand-out for me has probably been the reaction of the yen from the BOJ,” City Index strategist Fiona Cincotta said. “Just on the fact that the market was expecting a bit more of the Bank of Japan, in setting off on a new cycle and has been quite disappointed.”

Expectations for policy easing in China too have piled pressure on its currency, which dropped sharply in the onshore session, spooking equity investors and prompting state banks to step in.

It was last at 7.229 per US dollar, while in offshore trading the US dollar headed for its largest one-day rise against the yuan in a year, up 0.7 per cent to 7.2716.

Sterling dropped 0.6 per cent to one-month lows at US$1.258, following Thursday’s 1 per cent fall after the Bank of England left interest rates unchanged, this time backed by the two hawkish committee members who had previously voted for a hike.

Bitcoin was set for its largest weekly drop since last August, with a roughly 6 per cent fall, as crypto markets have taken a step back from a powerful rally this week – though it will trade through until Sunday.

It was last down 3.46 per cent on the day at US$63,192, having fallen by some 13 per cent since a record high close to US$74,000 last week. REUTERS