After a month of sky-high appreciation, the largely weighted US dollar index dipped from 20-year highs. The weaker US dollar dropped from its highest levels against the euro and yen in five and twenty years, respectively.
The dollar index was on course for an overall gain of more than 4% in April, which would be its highest monthly result since 2015. The dollar’s spike is due to strong US economic fundamentals, which put the Fed on track to raise interest rates significantly.
The dollar has also served as a safe haven against growth-related risks associated with the conflict in Ukraine, market volatility, and concerns about China’s sluggish economy. The direction of the day will be influenced by a plethora of international data, such as Canadian growth and American consumer spending and inflation.
After a positive batch of data retained a clear route for the Fed to hike rates quickly, the US dollar pared session declines. With a 1.1% increase in March, US personal spending surpassed expectations, and income growth was also stronger than expected. While the core reading dropped slightly to 5.2%, a measure of headline inflation increased to new highs of 6.6% from 6.3%, indicating that inflation may have peaked or be close to it.
The Federal Open Market Committee’s (FOMC) rate decision on May 4 could significantly impact the price of the euro against the dollar. The central bank is widely expected to raise interest rates by 50 basis points. It is unclear whether Chairman Jerome Powell will implement quantitative tightening (QT), as the “Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.”
However, a delay in the Fed’s exit strategy could lead to a short-term rebound in the exchange rate amid expectations for an impending change in ECB policy. This is because another FOMC rate hike and measures to reduce the central bank’s balance sheet may keep the EUR/USD under tension as the committee stabilises monetary policy at a quicker pace.
After rising above 130.00 for the first time in 20 years, USD/JPY is intensifying its bullish momentum.
After the Bank of Japan (BOJ) supported its ultra-loose monetary policy while stepping up its bond purchases, the decline in the value of the yen was exacerbated.
To protect the 0.25% yield restriction on 10-year Japanese Government Bonds (JGB), the central bank promised to acquire an unlimited amount of fixed-rate bonds every business day.
The BOJ’s dovish posture increased the yield gap between the US and Japan when the Fed is still on course to raise interest rates twice, in May and June. Before that, the briefing of BOJ Governor Haruhiko Kuroda will be scrutinised for new insights on the depreciation of the yen.
NZD/USD has declined to nearly reach the long-term key level of 0.6447, which was the high point on March 20. Following a decline from a high of 0.6543, the cycle’s low was at 0.6451. Near the end of April, the US dollar rose to its highest level in two decades.
The yen fell to its lowest level since 2002 due to the Bank of Japan’s (BOJ) decision to continue its ultra-loose monetary policy. This resulted in a commodities whitewash, which pushed the NZD lower.
According to analysts at ANZ Bank, ”The Kiwi initially fell further versus the dollar, amid broad USD strength overnight. This was compelled by the US GDP number. While the economy shrank in Q1, private domestic demand remains strong. This crystallised hawkish expectations for the Federal Reserve. In fact, pricing for Fed hikes increased, which underlay the USD strength. Any reversal in this trend will likely need to wait until the FOMC meeting next week, at least.”
Attention would also be on New Zealand employment and what that means for the Reserve Bank of New Zealand (RBNZ). ANZ Bank’s analysts further stated, ”We’re picking that the Unemployment Rate fell slightly to 3.1%, versus 3.2% in the fourth quarter, Q4. But with Omicron peaking in the March quarter, uncertainty is high.”
”Whatever the headline numbers, we expect the details of the release will confirm what we saw in the Q1 QSBO – that the labour market is becoming increasingly stretched, and will be a key source of domestic inflationary pressure of 2022.”
According to the analyst, the data should demonstrate to the RBNZ that another 50bp OCR increase is required in May to keep pace with domestic inflation. ”The strong labour market is the keystone for our forecast of a soft landing for the economy. With housing markets softening across the country, ongoing low unemployment and rising wages will be key.”
The short-term direction of the gold price will depend on the US core PCE release, FOMC policy decision, and commentary. The US inflation rate is still high and is not expected to substantially decline. The Fed will likely increase interest rates by 50 basis points in its next two sessions. It will also provide more information about its next quantitative tightening program. The price of precious metals will continue to suffer due to dramatically rising interest rates and unmanageably high inflation.
The energy crisis in Europe is helping the US dollar appreciate as Russian gas producers threaten to shut off the supply to Poland and Bulgaria, putting a lot of pressure on the euro. Some EU gas producers consider caving into Russia’s demand for payments to be made in roubles.
Investors are anxious as they take refuge in the biggest safe haven, the US dollar, due to China’s covid lockdowns and their effects on development and the global supply chain.
Ahead of the American Q1 advance GDP release, which was anticipated to reflect a decline in the largest economy in the world, investors also tend to hold US dollars. A negative print might rekindle recessionary concerns and increase demand for the dollar as a safe haven.
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