Dollar Recovery Over, but Fed Could Spark Second Wave of Strength

The dollar fell sharply against its rivals Monday as analysts declared the recovery in the greenback over, but stopped short of ruling out a “second wave” of strength on worries the Federal Reserve could raise rates sooner than expected.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.50% to 91.08.

“The short-term recovery of the dollar is over for now … [but] we cannot rule out the possibility of a ‘second wave’ of USD recovery,” Commerzbank (DE:CBKG) said.

The bank suggested there was a risk the Federal Reserve could tighten monetary policy sooner-than-expected that would justify an “expensive” dollar. “The Fed could once again (as it did in 2015 to 2019) pursue a monetary policy in the medium term that is so qualitatively different from that of the ECB that an “expensive” dollar would be justified.

In the event of a second coming of dollar strength, the move will be short-lived as inflation is unlikely to trend materially above target and prompt aggressive Fed action. “The assumption of rapid Fed rate hikes is ultimately based on the assumption that U.S. inflation will not only pick up in the short term due to (partly Corona-related) special effects, but will sustainably firm up to levels above the Fed target. We do not share this view of the market,” Commerzbank added.

The dollar made a poor start to the week, compounding its losses from last week, following a slip in U.S. bond yields.

U.S. bond yields gave up some of their gains Monday, with the 10-year Treasury yields at 1.59%, down from 1.61% at the highs of the day.

Still, the latest positioning data showed bullish bets on the greenback hit their highest level for the year so far.

Net longs speculative bets on the dollar were at the highest level year-to-date, according to a CFTC positioning report for the week ended on April 13.

RBA Sees Policy Helping Stem Aussie, Monitoring Home Borrowing

The Reserve Bank of Australia said its policy settings were helping hold down the currency, while surging property prices meant it needed to monitor trends in home borrowing, according to minutes of its April meeting.

(Bloomberg) — Easy policy “continued to support the economy by keeping financing costs very low, contributing to a lower exchange rate than otherwise,” the central bank said Tuesday in the minutes. “Members agreed that it would be important to watch carefully for increased risk-taking by lenders.”

Australia’s V-shaped recovery is reflected in the labor market, with hiring surging and unemployment falling even as the labor force swelled to a record last month. The economy faces a challenging few months ahead with the expiry of the government’s vast JobKeeper wage subsidy program, forcing firms and households to stand alone.

“While the overall recovery in the labor market was expected to pause in the period ahead, this was expected to be only temporary,” the RBA said. “It was likely that the full effect of the end of the JobKeeper program would become apparent over several months.”

Australia’s jobless rate dropped to 5.6% in March as employment soared by more than 70,000, according to data released last week, after policy makers held their meeting.

The central bank said in the minutes that A$95 billion had been drawn from its lending facility that provides cheap funding to banks and a further A$95 billion was available until the end of June. The board said it would consider extending the facility if “there were a marked deterioration in funding and credit conditions.” There are no such signs currently, the bank said.

The RBA is currently tapping a second A$100 billion tranche of quantitative easing to help hold down the currency. Beyond this, the bank said it would undertake further bond purchases “if doing so assisted with progress towards the goals of full employment and inflation.”

It reiterated that a decision on whether to roll over yield curve control to the November 2024 three-year bond from the current April 2024 maturity would be made later in the year. Its decision would be guided by “the flow of economic data and the outlook for inflation and employment.”

Australia’s hot housing market is likely to be increasingly central in RBA discussions, with house prices rising in March at the fastest pace since 1988.

“Given the environment of rising house prices and low interest rates, the bank would be monitoring trends in housing borrowing and the maintenance of lending standards carefully,” it said.

Yet Australians, like counterparts in much of the developed world, have solid financial buffers as people saved government cash payments during the height of the pandemic. The rapid recovery in the labor market is helping households meet their financial commitments.

The RBA noted survey data suggested income and savings increased for most household income groups, “with most of the additional saving undertaken by higher-income households.”

The RBA also provided some observations on the economy’s performance in the first quarter:

  • GDP in the March quarter was likely to have recovered further to around its pre-pandemic level, earlier than previously expected; and
  • Growth in household consumption had moderated in the March quarter following strong growth in previous quarters

In a cross-country reference discussion, the RBA noted that despite Australia’s rapid recovery in employment, wages growth had slowed to a greater extent “and had been more subdued than in other countries.” A key reason is Australia’s labor market adjusted by reducing hours and restraining wages, whereas countries like the U.S. adjusted through a decline in employment.

The upshot is that the central bank’s goal of wages growth sustainably above 3% to return inflation to target remains a high hurdle.

The RBA also noted in the minutes that the board would have a broader discussion on the implications of climate change for financial stability in coming months.

Dollar Faces Weekly Drop Again as Positive Data No Longer Enough, Experts Warn

The dollar looks set to post a second-straight weekly decline Friday, shrugging off a wave positive data earlier this week, and will continue to do so as most of the good news has already been priced in, Commerzbank (DE:CBKG) said.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.01% to 91.55.

Data earlier this week including retail sales and initial jobless claims surprised to the upside, but that drew little support to the dollar. The humdrum reaction suggests “the positive effect of Biden’s economic stimulus package and good vaccination progress in the US is largely priced in,” Commerzbank said. “Strong U.S. data can no longer support the U.S. dollar.”

With most of the strong data and positive vaccine news now priced in, the greenback will struggle to make gains in the short-term.

The immediate horizon, meanwhile, doesn’t offer up much reason for optimism for dollar bulls. A helping hand from the the Federal Reserve is still aways off as Chairman Jerome Powell said the central bank was “highly unlikely” to raise rates before 2022.

“We’ve said we expect to keep rates where they are until meet three-part test,” Powell said Wednesday at a virtual event organized by the Economic Club of Washington. The three part test includes maximum employment, inflation reaching 2%, and on track to run moderately above 2% for some time.    

Biden’s new infrastructure plan, aimed at long-term economic momentum, however, could provide the ammo needed for the dollar to rediscover its form, but progress on the legislative measure is unlikely until the summer.

“The infrastructure plan is contentious, and if it were to pass Congress, would only become more concrete in the summer,  […] for now, the plans are too abstract to support the dollar on a sustainable basis,” Commerzbank added.

Dollar Edges Higher After Treasuries Undermine Recent Strength

The dollar was a touch higher in early trading in Europe, still supported by strong retail sales and labor market data on Thursday, but still on course to end the week lower, due to falling Treasury yields that are making other currencies relatively more attractive.

Various reports suggest that large institutional participants such as global macro hedge funds have closed out short positions on U.S. Treasuries this week, having been convinced that the Federal Reserve won’t be rushed into tightening monetary policy by a spike in inflation rates over the next few months. That spike is as good as guaranteed, due to the collapse of oil prices in spring 2020, which is creating a huge base effect on year-on-year rates.

The euro has been a beneficiary as the yield differential has narrowed – not least because the decline in Treasury yields has gone hand-in-hand with signs of a strong U.S. rebound that will support Europe’s export-sensitive economy.

Base effects were also in evidence in a 63% year-on-year rise in European car sales in March.

Earlier, the Chinese yuan was left largely unmoved by first-quarter gross domestic product data showing that the economy grew slightly less than expected. Quarter-on-quarter growth slowed to 0.6% from 2.6% in the fourth quarter of 2020. The dollar rose 0.1% against the offshore yuan to 6.5310 but is still down 0.4% on the week.

The news also weakened the Aussie and New Zealand dollars slightly, but these, too, have also made solid gains against the greenback this week.

Later Friday, the U.S. Treasury is due to release its latest report on currency manipulation. The report is expected to be used as an opportunity to signal an end to the previous administration’s policy of talking the currency down in order to narrow the U.S. trade deficit.

In this context, various reports have suggested that China will not be listed as a currency manipulator, but Taiwan – whose foreign exchange reserves have risen sharply in the last year to stop an undue appreciation of the TWD – will be.

The Russian ruble too is ending the week on a strong note. It rose 0.5% against the dollar to 75.91 after the fresh round of U.S. sanctions turned out less punishing than feared. Although U.S. investors will be barred from buying Russian sovereign debt in the primary market, they will still be allowed to use the secondary market.

The opposite is true for the Turkish lira, which is under pressure again after the new central bank governor decided to drop his predecessor’s pledge to keep interest rates high for an extended period of time to bring inflation down. The dollar rose 1.0% against the lira to 8.0872.