Market Watch: Dollar Takes a Beating as Traders Anticipate US Rate Peaking

Key Highlight

1. The dollar is recovering from its largest daily decline since February.
2. The euro, yen, yuan, Aussie, and kiwi reach new highs in Asia.
3. The dollar index is below 100.5, marking its lowest level since April 2022.

In recent trading sessions, the US dollar has experienced a significant decline, marking its worst daily drop since February. Traders in Asia have perceived the sluggish US inflation as an indication that the era of US interest rate hikes is drawing to a close. Consequently, the dollar's value has plummeted, reaching its lowest point since April 2022. This article explores the impact of these developments on various currencies, including the euro, yen, yuan, Aussie, and kiwi.

Dollar Weakens Across Major Currencies

The dollar's weakness persisted in Asia, with the euro, yen, yuan, Aussie, and kiwi all reaching new highs. The euro, in particular, surged to $1.1141, a level not seen in the past 15 months. The yen also demonstrated strength, climbing 0.3% to 138.16 against the dollar, its highest since mid-May. Concurrently, the US dollar index experienced a slight decline, falling to 100.47, its lowest since April 2022. Furthermore, the New Zealand dollar rose to a two-month high of $0.6309, while the Australian dollar reached a three-week peak of $0.6796.

Traders Display Confidence in Dollar's Downward Trajectory

Although the shifts in currency values were modest, they indicate that traders believe the dollar still has room to decline further. Offshore trade saw the yuan reach a one-month high against the dollar, and both sterling and the Swiss franc approached their overnight highs. This growing sentiment among market participants suggests a shift in comfort levels when it comes to shorting the dollar, particularly as the terminal Federal Reserve policy rate appears to have reached its peak.

Inflation Data and Implications

US core inflation figures for June showed a 0.2% increase, falling short of the market's expectation of 0.3%. Additionally, headline annual CPI decreased to 3%, a notable drop from the peak of 9.6% observed a year ago. Steve Englander, head of global G10 currency research at Standard Chartered, described the recent inflation data as "very benign" and emphasized the diminishing impact of excessive CPI gains. He also expressed doubt about the likelihood of another rate hike by the Federal Reserve following the meeting scheduled for July 26.

Market Expectations and Rate Speculation

Interest rate futures indicate that a Federal Reserve rate hike later this month has already been fully priced in. However, expectations for further increases are being adjusted downward. This adjustment is evident in the drop of over 15 basis points in two-year Treasury yields, which are closely tied to rate expectations. Consequently, the yields now stand at 4.73%. Meanwhile, in Scandinavia, where inflation is proving to be persistent and central bankers are projecting additional rate hikes, currencies such as the Swedish and Norwegian crowns have surged, with gains of over 2% and an anticipated increase of approximately 5% for the week.

The Yen's Strength and Market Focus

Over the past five trading days, the yen has appreciated by 4.8% against the dollar, and similar gains have been observed against other major currencies. This notable shift in the market can be attributed to the clearing out of short-sellers, prompting investors to turn their attention to whether the Bank of Japan (BOJ) will adjust its yield control policy in the near future. Japanese government bond yields reached multi-month highs on Wednesday, although the closely monitored 10-year yield remains below the BOJ's 0.5% cap at 0.46%, indicating limited speculation regarding a policy shift.

Sterling and Swiss Franc Performance

Sterling currently sits at $1.2994, slightly below its overnight high of $1.3001. The Swiss franc, which reached its highest point since 2015 overnight, is trading just below that level at 0.8661 francs to the dollar. The movements of these currencies further demonstrate the prevailing weakness of the US dollar and the favorable conditions for alternative currencies.

Upcoming Economic Data

Later on Thursday, the release of Chinese trade data, European Central Bank meeting minutes from the previous month, European industrial production figures, and British monthly GDP will provide further insights into global economic conditions.

Footnote

The recent decline of the US dollar against major currencies suggests that traders anticipate a peak in US interest rates. Sluggish US inflation figures and diminishing expectations of further rate hikes have weakened the dollar. Meanwhile, other currencies, such as the euro, yen, yuan, Aussie, and kiwi, have experienced upward momentum, demonstrating traders' confidence in the dollar's continued decline. As economic data continues to shape market sentiment, it remains to be seen how these trends will develop in the near future.