US dollar weakens after gains all week
THE US dollar fell on Friday (May 19) after posting gains for most of the week, as optimism over a breakthrough in US debt ceiling talks boosted risk sentiment and spurred buying of currencies that benefit from positive economic and market conditions.
The euro, sterling, and commodity currencies such as the Australian, New Zealand and Canadian dollars all rallied at the expense of the greenback.
The dollar index eased 0.2 per cent to 103.31, after hitting seven-week peaks the previous session. On the week, the dollar posted a 0.6 per cent gain.
Negotiators for Joe Biden’s Democrats told the president on Friday that they are making “steady progress” in talks with Republicans aimed at avoiding a US default, just days after Biden and top US congressional Republican Kevin McCarthy underscored their determination to strike a deal to raise the government’s US$31.4 trillion debt ceiling. That eased fears of an unprecedented and economically catastrophic default.
“There is a little bit of excitement over the debt ceiling, which is helping risk appetite,” said Brad Bechtel, global head of FX at Jefferies in New York. “It’s also a Friday and people cover ahead of the weekend. The dollar has had a nice rally all week.”
At the same time, data pointing to a still-tight labour market, with the number of Americans filing new claims for unemployment benefits falling more than expected last week, also raised expectations that the Federal Reserve could raise rates again next month to tame inflation.
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The market has priced in a roughly 36 per cent chance that the Fed raises the benchmark rate at its June meeting by 25 basis points, with the majority of traders still factoring in a pause.
Money markets also showed traders believe US rates will fall to around 4.7 per cent by year-end, compared with an expectation for a drop to 4.25 per cent just two weeks ago – reflecting how the chances of a flurry of rate cuts have dropped.
“The message from the Fed has been really hawkish,” said City Index strategist Fiona Cincotta. “We know there has been this divergence between what the market’s expecting and what the Fed has actually been saying, and that was always going to need to be reconciled at some point. We’re starting to see this play out in the FX market now.”
Two Fed policymakers said on Thursday that US inflation does not look like it is cooling fast enough to allow the Fed to pause its tightening campaign.
Investors currently hold bearish bets, or short positions, against the dollar versus other G10 currencies worth nearly US$12 billion – the largest in almost two years. This would suggest there could be some incentive to unwind some of those bets, meaning the dollar has room to rally.
In mid-morning trading, the dollar slipped 0.1 per cent against the yen to 138.55 yen, having risen to a six-month peak of 138.745 earlier. On the week, the dollar gained 2.1 per cent, on track for its largest weekly rise since mid-February.
The euro rose 0.2 per cent to US$1.0791, just above its lowest for seven weeks, while sterling inched up 0.2 per cent to US$1.2434, not far off its lowest in a month.
Among other major currencies, the Australian dollar took some heart from a pickup in commodity prices such as copper and iron ore, rising 0.5 per cent to US$0.6653.
In China, the yuan slid to its lowest since December to 7.0752 per US dollar in the offshore market, as data offered evidence of a sputtering recovery in the world’s second-largest economy. The dollar, however, was last down 0.2 per cent at 7.0259. REUTERS
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