US dollar rises after blockbuster US data lures in bulls

THE US dollar rose on Friday (Oct 27) and is set for a third monthly gain after solid US growth figures argued for interest rates to remain high for longer, while the yen struggled around the 150 level ahead of the Bank of Japan’s policy meeting next week.

The US economy grew at its fastest pace in nearly two years in the third quarter, data on Thursday showed, as higher wages from a tight labour market helped power consumer spending.

That, together with another round of robust surveys of business activity, has beefed up expectations for the Federal Reserve to keep monetary conditions restrictive for longer, driving the US dollar broadly higher this week.

The US dollar index rose 0.2 per cent to 106.77, having hit a three-week high of 106.89 in the previous session, and was on track for a weekly gain of about 0.35 per cent.

“The story of this week has been US economic exceptionalism continues, particularly in contrast with the eurozone and the UK,” City Index strategist Fiona Cincotta said.

“Yesterday’s data was really interesting. We had stronger PMIs at the start of the week, followed by strong Q3 GDP growth and signs of Americans spending their way through the summer – few signs of the aggressive rate hikes reining in consumption,” she said.

The euro fell 0.2 per cent to US$1.0539, set for a weekly loss of 0.5 per cent.

The European Central Bank (ECB) on Thursday left interest rates unchanged as expected, ending an unprecedented streak of 10 consecutive rate hikes.

“With a rapidly deteriorating macroeconomic landscape, as shown by October PMIs, in our view the ECB will have to tread very carefully going into 2024 and will have no choice but to lower interest rates,” said Julien Lafargue, chief market strategist at Barclays Private Bank.

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Data earlier this week showed eurozone business activity took a surprise turn for the worse this month.

Sterling slipped 0.2 per cent to US$1.2108, narrowly above Thursday’s three-week low at US$1.2070.

Retreat in yields

Risk sentiment generally stayed subdued after a downbeat session on Wall Street that sent stocks tumbling and underpinned US Treasuries, pushing yields lower.

“The retreat in yields was to do with a little bit of flight to quality, because what you saw last night was pretty devastating action in the equity market,” said Tony Sycamore, market analyst at IG.

“The last few Fridays ... we’ve seen very much flight-to-safety type moves (because) ahead of the weekend, we’re not really sure what’s going to be playing out in terms of Gaza,” he said.

The Australian dollar, often used as a proxy for risk appetite, rose 0.3 per cent to US$0.634, having slid to a one-year low of US$0.6271 on Thursday.

The yen continued to wobble on the weaker side of 150 per US dollar, a level some have seen as a potential trigger for intervention by Japanese authorities.

The yen gained 0.2 per cent to trade around 150.08 per US dollar, but barely above Thursday’s one-year low of 150.78.

Japan will continue to respond to the currency market “with a strong sense of urgency,” Finance Minister Shunichi Suzuki told reporters on Friday.

The BOJ meets next week and speculation is mounting that the central bank could change its policy on bond-yield control. An increase to an existing limit on yields set just three months ago has been discussed as a possibility.

“If we come in with US dollar/yen up at 151 next Monday, then there’s more chance I think they’d lift the cap,” said IG’s Sycamore. “The higher the US dollar/yen goes in the interim, the more chance there is of a tweak.” REUTERS