The Business Times

US dollar climbs as traders eye central bankers

Published Mon, Oct 31, 2022 · 08:28 PM

THE US dollar advanced on Monday (Oct 31), regaining some ground it lost earlier in the month, at the start of a week packed with data releases and central bank rate-setting meetings, including by the Bank of England (BOE) and most importantly the US Federal Reserve.

The euro slid 0.36 per cent to US$0.9932, sterling lost 0.67 per cent to US$1.1537, and the US dollar rose 0.82 per cent against the Japanese yen to 148.6, as the weakness seen in the greenback earlier in the month continued to fade.

The US dollar is set for a monthly decline in October – its first since May and only its second this year – on expectations the Fed could signal a less aggressive future programme of rate hikes at its policy meeting that begins on Tuesday.

However, late last week this narrative ran out of steam, and it continued to struggle on Monday.

“Currency markets are in wait-and-see mode ahead of the (rate setting) Federal Open Market Committee meeting on Wednesday after we saw a bit more of a balanced tone from some other central banks,” said Samy Chaar, chief economist at Lombard Odier.

“The question is will the Fed follow through – it’s not going to be a dovish pivot, it’s far too soon to loosen financial conditions – but will we get something more balanced rather than another hawkish surprise?”

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The Australian and Canadian central banks both raised rates by less than expected at their October meetings, and markets read a dovish tone in last week’s European Central Bank 75-basis-point (bp) hike.

The Fed is expected to deliver another 75-bp rate hike when the meeting concludes on Wednesday, which would be its fourth such increase in succession, but market pricing indicates roughly a 50 per cent chance of just 50 bps at its December meeting.

The euro barely reacted after data released on Monday that showed eurozone inflation came in hotter than expected at 10.7 per cent, a fresh record high.

“Because we had the national inflation data on Thursday and Friday the eurozone data was old news,” Chaar said.

Also released on Monday was data that showed Japan spent a record 6.3499 trillion yen (S$57.1 billion) on currency intervention this month to prop up the yen.

Elsewhere, the Chinese yuan slumped after data released on Monday showed China’s factory activity unexpectedly fell in October, weighed down by softening global demand and strict domestic Covid-19 curbs.

The US dollar was last 0.74 per cent higher against the yuan traded offshore at 7.32.

“We expect that the Chinese yuan will weaken further in the short term given the apparent weakness of the economy. Together with more Covid cases and expected lockdowns, it becomes even more difficult to be upbeat about the yuan,” said Iris Pang, chief economist for Greater China at ING.

Also on the week’s agenda is the BOE which will meet on Thursday, after a volatile period in British political and fiscal policies. A 75-bp rake hike is almost fully priced in.

The Reserve Bank of Australia (RBA) is tending towardss the dovish end of the spectrum and is expected to raise interest rates by a more modest 25 bp at its Tuesday meeting, even as inflation raced to a 32-year high last quarter.

The Aussie dollar was down 0.35 per cent US$0.6389.

The US dollar climbed 2 per cent on Brazil’s Real after former President Luiz Inacio Lula da Silva narrowly defeated President Jair Bolsonaro in a run-off election. REUTERS

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