Dollar stabilizes, currency investors seek hawkish central banks
A businessman is seen holding up a stack of US banknotes.
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The dollar stabilized on Friday and major currency pairs remained stuck in recent ranges as markets ignored Thursday’s high US inflation figure, believing the Federal Reserve’s stance is likely to be a temporary incident.
Consumer prices in the United States rose 5% year-on-year in May, the biggest jump in nearly 13 years.
Currency markets had been sluggish all week ahead of the data, but when they exceeded expectations, there was little market reaction. The Federal Reserve has repeatedly stated that it expects any rise in inflation to be temporary and that it is too early to discuss reducing its monetary stimulus.
The dollar index edged down during the Asian session, but rallied later in the day. At 10:56 am GMT, it was up 0.1% on the day to 89.995. He was on track for a small weekly gain of 0.1%.
“We agree with the Fed that the high inflationary pressures will be short-lived,” UBS strategists said in a note to clients.
“Policymakers at the Federal Reserve and the European Central Bank have been exceptionally consistent in stressing that policy will only need to be tightened if inflation becomes more sustained – which they currently consider unlikely.”
There were signs of a slightly increased risk appetite in the forex markets, with the Australian dollar appreciating against the US dollar. But the British pound slipped to $ 1.4159.
An accommodating stance by the ECB at its Thursday meeting had little effect on the euro, which slipped to $ 1.2152 on Friday and was pegged for a small weekly loss of around 0.1%.
An implied euro-dollar volatility gauge over a six-month horizon was at its lowest since early March 2020, almost to levels it had before the COVID-19 pandemic caused volatility to increase.
Neil Jones, head of currency sales at Mizuho, said he received many questions from customers about central banks likely to hike rates ahead of the Fed and the ECB.
“There is some interest in buying these currencies over the long term because of the potential for longer-term FDI (foreign direct investment), inward investment flows. The money could gravitate towards the economies that are there. ‘vanguard of the exit from the pandemic, “he said.
The British pound, Canadian dollar, Australian dollar and New Zealand dollar are currencies that could gain against a weaker US dollar, Jones said.
ING strategists wrote in a note to clients that central banks’ “liquidity glut” led to a search for “carry”. In currency trading, “carry” refers to gains resulting from holding higher yielding currencies.
“This environment should continue to see the dollar offered soft against currencies with good stories (monetary tightening or exposure to commodities) and some carry,” said ING.
Russia’s central bank raised its policy rate to 5.5% on Friday, raising the cost of lending for the third time this year due to rising inflation, and said further hikes would be needed.
Elsewhere in cryptocurrencies, bitcoin rallied slightly this week while ether was forecast for a weekly drop of 9%. Both have stabilized so far this month, but are still trading well below their mid-May highs.
Attention now turns to the Fed meeting next week. The central bank is expected to announce in August or September a strategy to cut its massive bond buying program, but will not start cutting its monthly purchases until early next year, according to a Reuters poll of economists .
Meanwhile, the leaders of the wealthiest economies in the Group of Seven are meeting in the English seaside resort of Carbis Bay. Although the meeting is not expected to contain any evolving market events, if leaders agree to provide more vaccines to countries in shortage, the currencies of those countries could benefit, Jones of Mizuho said.