On Monday, the value of the dollar decreased to its lowest point in over two months. This continued a trend of decline that started last week, as traders became more convinced that interest rates in the United States have reached their highest point and shifted their focus to when the Federal Reserve might start reducing rates.
During Asian trading, the dollar index reached its lowest point since September 1 at 103.53. This marks a continuation of its significant drop of almost 2% from the previous week, making it the steepest weekly decrease since July.
The euro reached its highest level since August against the weaker US dollar at $1.0937, while the Japanese yen strengthened to a 5–1/2 week high of 148.63 per dollar.
The markets have accounted for the possibility of the Federal Reserve implementing more rate hikes in the future. However, this sentiment has changed due to a series of U.S. economic indicators that were lower than anticipated, especially concerning inflation.
Attention is now shifted towards when the initial reductions in interest rates may occur, as indicated by futures pricing data from the CME FedWatch tool, which suggests a 30% likelihood that the Federal Reserve may start lowering rates in March.
Dane Cekov, a senior FX strategist at Nordea, explains that the decline in the value of the dollar is primarily influenced by the changes in interest rates and recent Consumer Price Index (CPI) data. He also mentions that there is a possibility of further weakness in the dollar, but only for a brief period.
Looking at it from a technical standpoint, the dollar appears to be undervalued compared to the euro. Typically, when this happens, there tends to be a period of consolidation.
The recently published minutes from the Federal Reserve’s most recent meeting, which were made available this week on Tuesday, may provide some insight into the thoughts of policymakers as they maintained interest rates at a steady level for the second time in this month.
The British pound slightly increased by 0.2% to $1.2484, reaching close to its highest point in two months. Meanwhile, the euro was last valued at $1.0926. This comes ahead of the release of flash PMI readings in the euro zone later this week. Additionally, Moody’s unexpectedly improved the outlook on Italy’s ‘Baa3’ sovereign rating from negative to stable and upgraded Portugal’s rating by two notches to ‘A3’.
Cekov from Nordea believes that this development will have a positive impact on the euro area by reducing the risk premium for Italy and Portugal.
Cekov stated that in that regard, it reduces some of the potential negative consequences for the euro. That is his initial reaction.
The Japanese yen maintained its strength at a value of over 150 yen per dollar and recently increased by 0.7% to 148.56 yen.
In other parts of Asia, the value of the yuan increased significantly compared to the US dollar, reaching the highest level in over three months in both domestic and international markets. This was due to the efforts of the central bank to boost the currency’s value, and also because exporters were in a hurry to exchange their US dollar earnings into the local currency.
The value of the Chinese currency, known as the onshore yuan, increased by 0.5% to reach a level not seen in over three months, with 7.1700 yuan per dollar. Similarly, the offshore yuan also experienced a rise, jumping by approximately 0.6% to reach a three-month high of 7.1703 yuan per dollar.
The Australian dollar increased by 0.6% and reached a three-month peak of $0.6563 before settling at $0.6551. Similarly, the New Zealand dollar also rose by 0.6% to $0.6031.
On Monday, China decided to keep its benchmark lending rates unchanged at the regular monthly setting, meeting the predicted outcome. This decision was made due to the ongoing depreciation of the yuan, which limited the potential for additional monetary easing. Furthermore, policymakers are awaiting the impact of previous stimulus measures on the demand for credit before making any further adjustments.
The Chinese yuan has experienced a decline of almost 4% compared to the US dollar in the domestic market this year. This decline can be attributed to the ongoing struggle for a stable economic recovery in China and the uncertain confidence of investors.
Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC: CMWAY), expressed her belief that the concept of a gradual revival of the Chinese economy will continue for some time.
I believe that as long as the Chinese economy does not experience a significant improvement, it will negatively affect the value of the yuan, Australian dollar, and New Zealand dollar in the near future.