The US dollar soared to a five-week high against a basket of six major currencies on Monday. Traders are betting that the Federal Reserve will continue to tighten monetary policy in the coming months. Such sentiment caused the dollar to recover. However, at the same time, the Japanese yen plunged. Investors are waiting for US consumer price data to be released on Tuesday. It is likely to offer some insights into the Fed’s future policy plans.
On Monday, the US dollar rose 0.7% to 132.48 Japanese yen. The latter’s government will announce on Tuesday who will succeed as governor of the Japanese central bank. Market participants are waiting for this news to learn what to expect from the BOJ in the new future. So far, the country has kept its ultra-loose monetary policy, which has caused the yen to struggle and trade in the red against the other major currencies. However, the government claimed that Japan was not ready to face rising interest rates in the wake of the COVID-19 pandemic crisis.
On Friday, some government officials signaled that former BOJ board member Kazuo Ueda would take over as governor. Although Ueda is considered to be aggressive, on the same day he claimed that the BOJ’s decision to maintain its ultra-loose policy was correct.
Naka Matsuzawa, chief strategist at Nomura in Tokyo, said investors are beginning to recognize that the new governor will be much more dovish than they expected. However, such a stance will cause the yen to continue falling.
What about the euro and the pound sterling?
The euro held firm against the dollar on Monday. It changed hands at $1.0685 at last. At the same time, the British pound was trading at $1,206. It was also stable against the dollar. The dollar index finally settled at 103.61. But it hit 103.8 earlier in the session. If the currency breaks above 103.9 points, it will trade at its highest level since early January. According to analysts, if the US CPI data turns out to be strong, it will boost the dollar, driving it higher.
Earlier this month, US jobs data showed that the country’s economy is strong. So there is less need for the agency to keep interest rates high, especially with inflation finally receding.
Barclays analysts said this week’s US CPI data would be one of the most important reports in recent months. While the strength of the US labor market supported the dollar, it may start to decline if the new data does not help the currency strengthen its position.
Meanwhile, the Swiss franc soared against the dollar despite new data showing Swiss inflation rising more than traders expected. Consequently, the dollar briefly plunged to 0.9220 francs. But the currency managed to rally soon. At last, it changed hands at 0.9237 Swiss francs.
How are emerging market currencies doing?
Emerging market currencies traded in the red on Monday. They added to its heavy losses against a recovering US dollar. In addition, the Polish zloty fell against the euro, reaching its lowest level since October.
On Monday, the zloty fell 0.4%. Central banker Joanna Tyrowicz said it was a mistake to keep interest rates at current levels. This comment sent the coin tumbling.
The National Bank of Poland decided to leave its main interest rate unchanged last week. It remains in standby mode, like other regional central banks, trying to assess how much damage the economy is suffering from the war in Ukraine.
Michael Wang, deputy portfolio manager at Mirabaud Asset Management, noted that Poland’s central bank appears more dovish compared to the euro zone and the rest of the EEC.
On Tuesday, Hungary’s exchange rate fell 0.2% against the euro. It was finally listed at 387.54 euros. Analysts believe the reports could show that Hungary’s inflation peaked in January.
In addition, the CZK rose 0.1% today. Lieutenant Governor Jan Frait announced that the Czech central bank could keep interest rates at current levels if the economy continues to grow as expected and inflation remains low.
On Monday, the MSCI Emerging Currencies Index fell 0.3% against the US dollar. The Russian ruble plunged to 73.65 against the USD, trading near its lowest level since April. Meanwhile, the South African rand was down 0.5% against the dollar, while the Turkish lira traded flat.
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