The Dollar Shows Promising Performance with 5th Consecutive Weekly Gain, While Yen Remains Vulnerable
The US dollar has continued its strong performance, marking its fifth consecutive weekly gain. Investors have tempered their expectations for Federal Reserve rate cuts, leading to the dollar’s rebound. However, the yen remains vulnerable and is hovering around the key 150 per dollar level.
Mixed US data has put pressure on the dollar, with retail sales falling more than expected in January. Despite this, analysts believe that the dollar’s strength may be limited in the near-term. Derek Halpenny, head of research at MUFG, explains that although the retracement of the dollar has been significant, there are still upside risks due to economic conditions in Europe, Japan, and China.
The dollar index, which measures the US currency against six major rivals, has seen a slight increase of 0.1 percent to 104.33 on Friday. It is on track to achieve a 0.23 percent gain for the week, its fifth consecutive weekly gain. This positive performance is attributed to Federal Reserve Chair Jerome Powell’s remarks earlier this month and strong US data, which have quashed expectations of early and deep rate cuts from the Fed.
Traders are now pricing in a 53 percent chance of a rate cut in June, compared to initial expectations of a rate cut in March. They anticipate 100 basis points of cuts this year, lower than the 160 bps initially projected for the end of 2023.
Despite recent data, investors still believe that the US will decline at some point in 2024. Francesco Pesole, forex strategist at ING, suggests that this is why EUR/USD is not far from a supporting floor despite the current strength of the dollar.
The euro has seen a small decline of 0.04 percent to $1.0769 and is not far from its three-month low of $1.0695 earlier this week. Investors are closely watching European Central Bank speakers after President Christine Lagarde reiterated the bank’s cautious stance on easing monetary policy. Bank of France head Francois Villeroy de Galhau has suggested that the ECB should not wait too long before implementing an initial interest rate cut this year.
The pound briefly saw a slight increase after UK retail sales grew at their fastest pace in nearly three years in January, surpassing expectations. However, this data did not significantly impact expectations around Bank of England (BoE) monetary policy.
In contrast, the Japanese yen has weakened by 0.22 percent to 150.24 per dollar and remains vulnerable. It is hovering around the 150 mark, which raises concerns about possible intervention by Japan to support its currency. Finance Minister Shunichi Suzuki expressed his concerns over the negative aspects of a weak yen.
Kieran Williams, head of Asia FX at InTouch Capital Markets, suggests that if US Treasury yields rise further, Japanese officials may need to take concrete action to slow down the pace of yen depreciation. The yen is highly sensitive to US rates and has already weakened by 6 percent against the dollar this year due to reduced expectations of rate cuts from the Fed.
Barclays Japan’s chief forex strategist, Shinichiro Kadota, expects the Bank of Japan (BoJ) to start hiking policy rates from April 2024. He believes that persistent inflation and strong wage growth will drive this decision, but at a gradual pace of 10 basis points per quarter. Kadota also mentions the 152 forex intervention threshold from last autumn.
BOJ Governor Kazuo Ueda has stated that the central bank will evaluate whether to maintain its various monetary easing measures, including negative interest rates when it achieves its inflation target.
The Australian dollar has eased by 0.08 percent to $0.65195, while the New Zealand dollar is down 0.16 percent to $0.60965.
In conclusion, the US dollar’s promising performance continues with its fifth consecutive weekly gain. However, analysts believe that its strength may be limited in the near-term. The yen remains vulnerable and is hovering around the key 150 per dollar level. Investors are closely watching US data and Federal Reserve rate cut expectations, as well as European Central Bank speakers and the Bank of England’s monetary policy decisions.
