Dollar steady but remains vulnerable after Fed steer

SINGAPORE: Major global currencies were steady early on Monday but seemed poised to extend last week’s uptrend as the dollar nursed its losses after the Federal Reserve dialled down its hawkish rhetoric.

The dollar index was flat at 105.11, with the euro at $1.0726. The dollar index declined more than 1% last week, its heaviest fall since mid-July and hit a six-week low.

World stocks too had their strongest week in a year as expectations the Fed was done raising rates gathered steam.

Other indicators such as weakness in U.S. jobs data, softer manufacturing numbers from around the world and a decline in longer dated Treasury yields also hurt the dollar, while stoking rallies in sterling, the Aussie dollar and causing the yen to bounce from the weaker side of 150-per-dollar.

Tina Teng, a market analyst at CMC Markets in Auckland, expects the trend to sustain through November.

“We always say bad news is good news, so it’s good then there is expectation for the Fed and other central banks to end the rate hike cycle sooner,” Teng said.

However, analysts at J.P.Morgan Securities sounded cautious.

“Dollar bears would be well served to temper their enthusiasm,” they wrote. “This is because, the pillars of USD strength have diluted, but not completely faded and are likely to eventually re-emerge over the medium-term as USD-supportive factors.”

Moreover, besides more evidence of a slowing U.S. economy, J.P.Morgan analysts say a sustained dollar selloff needs signs of improvement in the euro zone, China and other regions which it says are “still tenuous”.

Latest manufacturing surveys from China and Europe’s GDP and inflation data bear that out.

Treasury yields slumped last week after softness in U.S. jobs and manufacturing data and after Fed Chair Jerome Powell spoke of ‘balanced’ risks. Also, the U.S. government cut its refinancing estimate for this quarter, and announced lower increases in long-dated debt auctions than expected.

Yields on 2-year notes have dropped 25 basis points in roughly two weeks, while 10-year yields are down half a percentage point and at 5-week lows around 4.59%. The front end of the curve remains deeply inverted.

Futures markets swung to imply a 90% chance the Fed was done hiking, and an 86% chance the first policy easing would come as soon as June.

Markets also imply around an 80% probability the European Central Bank will be cutting rates by April, while the Bank of England is seen easing in August.

The Japanese yen weakened 0.16% to trade at 149.60 per dollar. CMC Markets’ Teng said the turnaround in the dollar’s direction and the yen’s recovery from lows last week suggested Japanese authorities probably need not intervene in the currency.

The yen hit 151.74 per dollar on Friday, edging close to last October’s lows that spurred several rounds of dollar-selling intervention by the Bank of Japan.

Sterling was last trading steady at $1.2368. Britain’s GDP data for the fourth quarter is due this week and, while sterling rallied strongly last week in a market that is heavily short the currency, it is still down about 6% in four months.

The drop in the dollar and yields helped underpin gold at $1,990, within striking distance of the recent five-month peak of $2,009.

In cryptocurrencies, bitcoin was up 1.23% at $35,057.20. The risky asset has been buoyed by the expected end of central bank policy tightening cycles.

The crypto industry has also become focused on the prospect of new spot bitcoin exchange-traded funds (ETFs), which would throw open the market to more investors. Though none have been approved, several firms have filed for such a product.