US dollar gives up Fed gains; yen and pound strengthen

THE US dollar turned lower on Thursday (Jul 6) as investors looked ahead to pivotal US labour market data following minutes from the Federal Reserve’s June meeting, while a broad risk-off mood lent support to the Japanese yen.

Minutes from the Fed’s meeting released on Wednesday showed that the vast majority of policymakers expect further tightening in US monetary policy, even as they agreed to hold interest rates steady last month.

That sent the US dollar slightly higher alongside Treasury yields, while stocks fell, as expectations grew that the Fed will resume its rate-hike campaign this month and that rates would stay high for some time to tame inflation.

The US dollar index, which firmed 0.2 per cent on Wednesday, slipped 0.3 per cent to 103.03.

“There were not too many major surprises with the Fed expected to hike later in July,” said Niels Christensen, chief analyst at Nordea.

“Investors are maybe being a bit hesitant moving towards the important jobs numbers but we are not seeing any big moves,” Christensen added, citing Thursday’s labour market releases of jobless claims, the private ADP national employment report and the US Labor Department’s Job Openings and Labor Turnover (Jolt) survey, and Friday’s payrolls report.

Markets are now pricing in an 85 per cent chance that the Fed will raise rates by 25 basis points at its policy meeting later this month, according to the CME FedWatch tool.

The yen, meanwhile, rose more than 0.5 per cent against the US dollar to 143.835 as concerns about the global growth outlook, resulting from the aggressive monetary tightening by major central banks, weighed on risk appetite.

The Japanese currency is traditionally considered as a safe haven asset.

“(The yen) was stronger on risk-off mode as fears of additional tightening may weigh on growth (and) risk assets,” said Christopher Wong, a currency strategist at OCBC.

“This is largely in line with our caution that worries of global growth concerns and rates staying higher for longer remain intact and may well curb risk appetite,” Wong added.

One dimensional

The pound hit a two-week high against both the euro and US dollar as financial markets bet that the Bank of England will raise rates to 6.5 per cent early next year, pushing the yield on the two-year government bond to its highest since June 2008.

“The FX market is taking more of a ‘one-dimensional approach’ to trading the British disease,” said Stephen Gallo, global FX strategist at BMO Capital Markets.

“Instead of selling GBP in anticipation of an economic slowdown, it is buying GBP on the basis of interest rate differentials,” Gallo said.

The Australian dollar recovered 0.4 per cent to US$0.6679, having fallen more than 0.5 per cent in the previous session following a private-sector survey showing China’s services activity expanded at the slowest pace in five months in June.

“The Aussie is very sensitive to every bit of news from China at the moment,” said Sean Callow, senior currency strategist at Westpac.

“Since we got that reopening-from-lockdown rebound in the services sector (in China) ... it’s been a bit patchy, and I think markets are just not quite sure if the Chinese government is serious about stimulating the economy.”

The Chinese yuan last traded at 7.2471 per US dollar in the offshore market, after having fallen about 0.4 per cent the previous session. The central bank set a stronger-than-expected midpoint fixing for the fourth straight day this week, which traders believe is an attempt to prevent the yuan from weakening too fast and too far.

Bitcoin hit a 13-month high of US$31,500, continuing to find support due to recent plans by fund managers to launch a US-listed spot bitcoin exchange-traded fund (ETF). REUTERS