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Last Week’s Dollar Retreat Turns Short-lived Amidst Israel Attack

The U.S. dollar retreated in the week ended October 6, weakening against the euro, the British pound as well as the Japanese yen. It however gained ground against the Australian dollar, which stood weakened by another monetary policy pause by the Reserve Bank of Australia. However, the retreat was brief as safe-haven Dollar gained following the sudden outbreak of political tensions in the Middle East.

The Dollar Index or DXY, which measures the Dollar’s strength against a basket of 6 currencies comprising the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish Krona and the Swiss Franc slipped 0.2 percent during the week, ending its 11-week bullish streak. The DXY closed the week at 106.04, versus 106.22, a week earlier.

Though hawkish overtones from the Fed, robust economic data from the U.S., recession concerns in the Eurozone and disappointing economic data from Asia had contributed to the recent rise in the Dollar Index, the last few days of the recent week witnessed an easing in the Dollar’s strength. The reversal in the Dollar’s momentum almost coincided with a softening in U.S. bond yields. The DXY, which had risen to the week’s high of 107.35 on Tuesday retreated and fell to the week’s low of 105.95 by Friday.

The jobs report released on Friday showed the U.S. economy added 336 thousand jobs in September, versus expectations of an addition of 170 thousand. The unemployment rate did not decline to 3.7 percent as expected but remained steady at 3.8 percent. The average hourly earnings, expected to be steady at 4.3 percent, however dropped to 4.2 percent. The mixed jobs data triggered uncertainty over the Fed’s perception of the strength of the labor market, averting a surge in the Dollar.

The Dollar’s weakness even after a stronger-than-expected jobs addition helped the EUR/USD pair close on a positive note in the week ended October 6. The EUR/USD pair gained 0.15 percent in the week, rising to 1.0586, from 1.057 a week earlier. From the low of $1.0448 touched on Tuesday, the euro jumped to $1.0601 by Friday.

The pound’s gains against the U.S. Dollar were more pronounced, with the sterling closing 0.34 percent higher during the week ended October 6. The GBP/USD pair closed trading on the first Friday of October at 1.2238, versus 1.2197 a week earlier. The pair ranged between the low of 1.2036 touched on Wednesday to the high of 1.2263 touched on Friday. PMI updates from U.K.’s manufacturing sector was more or less on expected lines, but services sector PMI increased more than expected.

The Reserve Bank of Australia in its meeting held on Monday, the first under the new Governor Michele Bullock, held rates steady extending the rate pause for the fourth straight month. The divergence between the RBA’s not so hawkish stance and the Fed’s aggressive stance resulted in the AUD/USD pair declining 0.79 percent to 0.6383, from 0.6434 a week earlier. The pair ranged between 0.6446 and 0.6284 during the week.

The USD/JPY pair crossed the psychological level of 150 during the week, rising all the way to 150.18 on Tuesday. The pair’s low of 147.38 was also recorded on Tuesday. On a weekly basis, the decline was marginal as the pair edged down 0.02 percent to 149.32, from 149.35 a week earlier.

The sudden outbreak of political tensions in the Middle East has altered the currency market equations that remained focused on the strength of the U.S. economy and the Fed’s hawkishness. Safe haven demand has lifted the U.S. Dollar whereas the spike in crude oil prices has spotlighted fuel-led inflation. The release of the FOMC Minutes due on Wednesday and the CPI readings due on Thursday only added to the anxiety.

In this backdrop, the Dollar Index increased to 106.29. The EUR/USD pair decreased to 1.0554, and the GBP/USD pair slipped to 1.2215. The AUD/USD pair is almost flat at 0.6382. Amidst demand for safe haven yen, the USD/JPY pair declined to 148.87.

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