While precious metals, stocks, and cryptocurrencies saw a
significant downturn this week, the U.S. dollar tapped a 20-year high
against the Japanese yen and a number of other currencies. The greenback
has seen five weeks of consecutive gains following the Federal
Reserve’s 50 basis point rate hike on Wednesday.
Greenback Climbs Higher Amid Economic Uncertainty
Before the U.S. central bank’s rate hike, the U.S. dollar tapped a two-year high and a 20-year high
against the Japanese yen last week. Economic concerns are tied to the
ongoing and strict Covid-19 lockdowns in China and the Ukraine-Russia
war. Reports note that Beijing may plan to mass-test 20 million people for Covid-19 and the Chinese capital could get locked down.
Moreover, Refinitiv data indicates the market is predicting a 90%
chance the Fed will implement a 75 bps hike in June. A majority of
financial institutions and market participants correctly predicted
Wednesday’s 50 bps increase. Futures markets are forecasting that the
chance of a 75 bps hike taking place in June is around 75%.
Statistics
show the U.S. dollar index (DXY) reached a 20-year high against a
basket of international fiat currencies this past week. Besides the
20-year high against the yen, sterling saw the deepest impact against
the greenback. Kit Juckes, a currency strategist at Societe Generale SA,
says the U.S. dollar has a knock-on impact.
“The dollar’s rally is like an uphill avalanche,” Juckes said
on May 4. “Just as an avalanche picks up snow, rocks, trees and
anything else in its path as it slides down a mountain, the dollar’s
rally has the knock-on impact of causing more currencies to weaken. A
broad-based move, though, tightens global monetary conditions, and so
downside economic risks grow.”
Strong Labor Market and Nonfarm Payrolls Report Could Change Fed’s Decision
Investors think the recently published Nonfarm Payrolls (NFP) report
numbers could affect the Fed’s next rate hike decision. ”A strong
payrolls report could perversely push the market to price in more
tightening as the Fed reduced its optionality at its most recent
meeting,” analysts at TD Securities said in a statement on Friday. The
TD Securities analysts added:
That leaves a resilient USD vs EUR and yen very much the
path of least resistance. A softer wages print should help to
temporarily take the edge off but this will be short-lived until
evidence of a peak/moderation in CPI emerges.
The combination of a strong dollar and the recently published NFP
numbers, could make the predicted 75 bps rate increase become a reality.
Although it’s still uncertain, analysts at ANZ Bank believe
this could be the case. “Whilst the Fed is not currently considering a
75 bps rate increase, that guidance is based on expectations that the
trend increase in monthly Nonfarm payrolls will slow and core inflation
is stabilising. But there are no guarantees at all that that will be the
case.” The ANZ Bank researchers concluded:
Demand for labour in the U.S. remains very strong and
core services inflation is rising steadily. The April non-farm payroll
and employment reports — [will] carry a lot of significance.
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