The US dollar is set for its most substantial weekly gain in nearly five months as bullish traders continue to provide much-needed respite for the currency.
The Bloomberg gauge of the dollar’s strength recorded an impressive 1% surge during the five-day period ending Friday, marking a notable recovery from the 15-month lows reached amid last week’s selling frenzy.
The recent partial recovery in the greenback comes as market participants prepare for a series of critical central bank meetings scheduled for the upcoming week. Among the central banks in the spotlight are the Federal Reserve, meeting on Wednesday, the European Central Bank convening on Thursday, and the Bank of Japan gathering on Friday.
Win Thin, the global head of currency strategy at Brown Brothers Harriman & Co., pointed out that the narrative surrounding the dollar has shifted back in its favor, at least for the time being.
Notably, developments in the eurozone, UK, and Japan have raised doubts about the hawkish central bank outlooks in those regions. Conversely, robust data from the United States has supported the hawkish outlook for the Federal Reserve.
Market focus has shifted toward the likelihood of a rate increase from the Federal Reserve, with pricing in the swaps markets indicating strong confidence in such a move.
Investors are now eagerly seeking guidance on whether the central bank has reached the peak of its tightening cycle or if further rate hikes could be on the horizon.
Yields on 10-year Treasuries edged lower by one basis point to 3.84% on Friday, reflecting the anticipation and uncertainty surrounding the Fed’s decision.
U.S Dollar Surges Toward Three-Month High Ahead of Fed Chair’s Speech at Jackson Hole Symposium
The greenback is surging toward a three-month high, leaving traders contemplating the possibility of enduring high-interest rates.
This surge comes just ahead of Federal Reserve Chair Jerome Powell’s much-anticipated speech at the Jackson Hole symposium this Friday.
The Bloomberg Dollar Spot Index made an impressive climb, reaching a 0.2% increase to levels not seen since early June.
Investors are on the edge of their seats, eagerly awaiting Powell’s remarks, which are expected to provide crucial insights into the Fed’s strategy for combating inflation. Many anticipate these insights to be more hawkish than what other central banks are suggesting.
This sentiment has propelled the dollar higher against all major currencies, with the South Korean won and the Swedish krona being hit the hardest.
Win Thin, the global head of currency strategy at Brown Brothers Harriman & Co. in New York, concurred, stating, “The fundamental landscape continues to favor the greenback. Recent decisions by the FOMC, European Central Bank, and Bank of Japan, coupled with ongoing economic data, underscore the growing divergence among central banks. As a result, we can expect further gains for the dollar.”
Just a few months ago, the greenback appeared to be losing its momentum before rebounding in recent weeks, suggesting that investors are reevaluating their bets on US interest rates.
This renewed strength of the world’s largest economy defies expectations of a slowdown.
On Thursday, two Fed officials indicated that the central bank may be nearing the end of its rate hikes, though one of them did not rule out the possibility of further increases until inflation shows a clearer downward trend.
“Powell is likely to emphasize that the job is not yet complete, maintaining a hawkish stance,” noted Rodrigo Catril, a currency strategist at National Australia Bank. “As a result, we can anticipate the dollar to continue its upward trajectory in the short term.”
Dollar Savings in Nigerian Banks Increase Amid Loss of Confidence in Local Currency
Over 40% of deposits in Nigerian banks are now in United States (US) dollars, according to a report by the International Monetary Fund (IMF).
The report shows that this increase in dollar savings reflects a loss of confidence in the local currency due to high and persistent inflation.
The use of US dollars for storing value in Nigeria has become increasingly popular, particularly for international trade and finance invoicing. However, the IMF warns that it may be difficult to reverse this trend.
Market participants in Nigeria defend their wealth by shifting to dollar savings under high inflation and exchange rate volatility. The process of reversing citizens’ savings in dollars could be complex even after addressing the initial trigger.
The IMF’s report suggests that the use of US dollars for storing value may continue to rise in Nigeria. This highlights the need for sustained efforts to address underlying economic issues and rebuild confidence in the local currency.
The Nigerian government and the Central Bank of Nigeria (CBN) will need to work together to create a more stable economic environment. This includes addressing the root causes of high inflation and exchange rate volatility, as well as implementing policies to encourage the use of the local currency for international trade and finance invoicing.
The implementation of the naira redesign policy and the issuance of new banknotes by the CBN have also contributed to the increasing use of US dollars for storing value in Nigerian banks. The policy introduced new 1,000, 500 and 200 naira denominations and withdrew the old notes from circulation.
The rise in dollar savings in Nigerian banks highlights the need for sustained efforts to rebuild confidence in the local currency and create a more stable economic environment. While reversing this trend may be difficult, it is essential for the long-term stability of the Nigerian economy.
Dollar Index Rebounds After Retail Sales Fall in March and Fed Warns of Inflation
The U.S. dollar has been bouncing off a one-year low against a basket of currencies, following the release of data showing retail sales fell in March.
This is coupled with a warning from a key Federal Reserve official that interest rates need to continue to be raised to bring down inflation. While investors are anticipating a slowdown later in the year, the economy remains relatively strong.
Senior foreign exchange strategist at TD Securities in New York, Mazen Issa, said, “The overarching theme is you’re getting a slowdown… I think what gets overlooked is it may take longer for things to unfold, maybe a grind, and the U.S. economy is more resilient than people have given it credit for.”
The dollar initially fell, but then reversed and moved higher after U.S. retail sales fell more than anticipated, with consumers cutting back on purchases of motor vehicles and other big-ticket items.
Issa added, “It was generally on the weak side with the exception of the retail sales control group, which is super core retail sales, it was just a little less negative than expected and makes you think that maybe the market was looking for something much weaker.”
This data was released just before Federal Reserve Governor Christopher Waller warned that despite aggressive rate increases over the past year, the central bankers haven’t made much progress in returning inflation to their 2% target and that interest rates still need to be raised.
Atlanta Fed President Raphael Bostic also suggested that one more quarter-percentage-point interest rate hike could allow the Fed to end its tightening cycle with some confidence that inflation will return to its 2% target.
Currently, Fed funds futures traders are pricing in an 85% probability that the Fed will hike by an additional 25 basis points at its May 2-3 meeting.
The dollar has dropped due to cooling inflation, with consumer prices barely rising in March and producer prices unexpectedly falling in the same month. However, some of Friday’s rebound may be investors taking profits from trades betting on a dollar decline.
As of the end of Friday, the dollar index was up 0.26% on the day at 101.22, after earlier falling to 100.78, the lowest since last April. The euro fell 0.23% to $1.1025, while the dollar gained 0.35% against the yen to 133.05.
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