The US dollar is currently at a six-month high as traders anticipate interest rate decisions from the Federal Reserve, the Bank of England, and the Bank of Japan this week. The euro is roughly level against the dollar at $1.0658, while the Japanese yen remains unchanged at 147.69 to the dollar with Japanese traders out for a public holiday. The dollar index, which tracks the currency against six significant peers, including the euro and the yen, is up marginally at 105.32.
The index rose for the ninth consecutive week last week, as the US economy continued to show strength. It reached 104.53 on Thursday, its highest since March. Alvin Tan, head of Asia FX strategy at RBC Capital Markets, said, “In the grand scheme of things, we’re quite positive on the dollar. The US economy is outperforming both Europe and Asia, especially China.”
Traders are looking towards a handful of central bank decisions later this week, which could shake up the currency market. The Federal Reserve is expected to keep interest rates on hold in the 5.25% to 5.5% range on Wednesday. RBC’s Tan said, “There’s a very firm consensus for a pause here. But there seems to be an expectation that we could see some hawkishness through the latest dot plot (of policymakers’ rate expectations), given how resilient the US economy has been.”
Traders then see the Bank of England raising rates by 25 basis points to 5.5% on Thursday, in what could be its final hike. They generally expect the Bank of Japan to leave rates on hold at -0.1% on Friday but will watch closely for hints about the policy outlook after Governor Kazuo Ueda stoked speculation of an imminent move away from ultra-loose policy.
In the days since Ueda’s remarks just over a week ago about an early move from negative rates, the yen has dropped 1.3% and taken losses for 2023 to more than 11%. Commonwealth Bank of Australia’s economist and currency strategist, Carol Kong, said she expects the yen to be volatile leading up to the policy meeting and that investors may have potentially misinterpreted Ueda’s comments.
Sterling was last trading at $1.2372, down 0.08% on the day. British inflation data is due on Wednesday and is likely to move the pound ahead of the Bank of England’s decision. Many analysts expect that stark divergences in economic growth and yields will keep the dollar mostly propped up, particularly against the euro.
The Sterling has slid nearly 6% against the dollar since mid-July, while the euro has dropped more than 5%, as the UK labor market and economy and the eurozone economy slowed. The European Central Bank raised interest rates to 4% last week but said this hike could be its last. Meanwhile, oil prices are trading at around $94 and are adding a layer of complication to central banks’ growth-inflation dilemmas. Oil is also on track for its biggest quarterly increase since Russia’s invasion of Ukraine in the first quarter of 2022.
Australia’s dollar is little changed at $0.6432.
(inputs from Reuters)