Dollar Mixed as CPI, Minutes Cement Tapering Expectations; Lira Slumps to New Low

The dollar eased against high-yielding currencies but advanced against the yen in early European trading on Thursday, as the market absorbed the implications of Wednesday higher-than-expected inflation data out of the U.S.

By 3 AM ET (0700 GMT), the Dollar Index that tracks the greenback against a basket of developed market economies was down 0.1% at 93.995, trading below 94 for the first time this week as sterling and the CanadianAussie and New Zealand dollars all advanced.

The dollar’s only notable gains were against the yen, where it rose another 0.3% to 113.53, supported by ever stronger expectations of a widening interest rate differential with Japan.

The U.S. inflation rate hit a fresh 13-year high of 5.3% in September while core inflation stayed at 4.0% thanks only to a sharp drop in air fares. Three senior Federal Reserve officials – Raphael Bostic, Mary Daly and Thomas Barkin – will have the opportunity to give their two cents’ worth on the developments in the course of the day. Minutes from the Fed’s latest policy meeting, released on Wednesday, cemented expectations that the Fed will announce the start of the withdrawal of stimulus at next month.

U.S. weekly jobless claims, due at 8:30 AM ET (1230 GMT) head the day’s economic calendar.

In emerging markets, the dollar surged to a new record high of 9.1872 against the Turkish lira, after President Recep Tayyip Erdogan fired three deputy central bank governors, further undermining its independence and anti-inflation credibility. The dismissals included the only member of the CBRT’s  decision-making council to vote against its shock interest rate cut in September, which happened against a backdrop of near-20% inflation.

The Chinese yuan edged lower after producer price inflation rose to a 26-year high at 10.7% in September, above expectations. China is one of few countries for whom an easing of monetary policy is on the table as it grapples with an ongoing credit crunch in real estate. The official yuan fixing of 6.4414 was the highest in nearly a month.

Further inflationary pressure is in the pipeline for China’s factories after the government allowed industrial electricity prices to rise to ease the pressure on the country’s utilities earlier this week.  

The Chilean peso came off a 17-month low against the dollar after the country’s central bank raised its key rate by a chunky 125 basis points to 2.75%, more than the 100 basis point rise expected.

NZ dollar soars, breaks 70 line

New Zealand dollar pummels greenback The New Zealand dollar has surged higher on Thursday and is currently trading at 0.7030, up 1.00% on the day. The currency has extended the previous day’s gains of 0.51%, as the US dollar finds itself in retreat mode. The US dollar index fell as low as 0.9376 today but […]

The Fate of Turkey’s Battered Lira Hangs With Local Investors

The Turkish lira risks falling out of favor with local investors, compounding a depreciation that’s dragged the currency to successive record lows over the past month.

So far, they’ve helped take the edge off the rout, selling more than $5 billion of their foreign-currency deposits in the three weeks through Oct. 1, according to central bank data. While the numbers can get amplified by changes in exchange rates, the headline figure is still the biggest draw down in half a year.

Now, with the prospect of another interest-rate cut looming large after the ouster of three key policy makers on Wednesday night, the fear is that households and companies may begin switching back into dollars and euros.

“The FX sales could quickly turn into FX purchases, creating extra pressure on the Turkish lira,” said Onur Ilgen, the head of the treasury at MUFG Bank Turkey in Istanbul, noting that recent foreign-currency sales were motivated by profit-taking.

Residents hold $233 billion of foreign currency, equivalent to around half of all deposits. While they’re nibble traders — buying dollars when the lira is strong and selling when it’s weak — over the longer-term they tend to accumulate hard currency. 

It’s a hedge against the inflation that’s debased the lira and eroded their savings. The Turkish currency is on track for its ninth straight year of depreciation, having lost more than 80% of its value since the end of 2012, the most in the developing world after the Argentine peso. 

“If locals become more concerned about the effects of lower interest rates on the lira, there is room for Turks to switch more deposits from liras into dollars,” said Nick Stadtmiller, director of EM at Medley Global Advisors in New York.

Surprise Cuts 

Last month, the central bank unexpectedly reduced interest rates to 18%, even with inflation running just shy of 20%. Investors say policy makers are falling in line with Erdogan’s call for lower interest rates while ignoring the risks to the outlook.

Speculation is building that the president is now paving the way for another cut after he fired three members of the central bank’s interest-rate setting committee in a midnight decree.

Read More: Erdogan Rids Turkey Interest-Rate Panel of Opponents to Cuts

Which side of the trade residents decide to take over the coming days and weeks also matters because foreign investors have already exited the market. They now hold less than 5% of the local-currency government debt stock, down from close to 30% in 2013.

“I think the downside risk for the lira with easier monetary policy is through domestic flows – not foreign outflows,” Stadtmiller said.

One redeeming factor for the lira is that a credit growth is slowing, which should help narrow the current-account deficit, reducing demand for foreign exchange in Turkey, according to Evren Kirikoglu, an Istanbul-based independent strategist.

Data on Monday showed the economy posted its first monthly surplus since Oct. 2020. 

But even then, with the lira breaching the psychologically important 9-per-dollar mark this week, local investors could “stop and even reverse” their foreign-currency purchases, Kirikoglu said.

Dollar Down, Set to Break Upward Trend as Risk Appetite Returns

The dollar was down on Friday morning in Asia, set for its first weekly decline since the start of September. It retreated from a one-year high as investors focus on when the U.S. Federal Reserve will start to hike interest rates.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched down 0.02% to 93.938 by 12:54 AM ET (4:54 AM GMT).

The USD/JPY pair was up 0.27% to 113.97.

The AUD/USD pair inched up 0.07% to 0.7420 and the NZD/USD pair was up 0.28% to 0.7055.

The USD/CNY pair inched down 0.04% to 6.4356 while the GBP/USD pair inched up 0.10% to 1.3687.

Improving risk sentiment, which boosted global stocks, commodity prices, and bond yields, also weighing on the safe-haven dollar. It only maintained the momentum of the past five weeks against the yen, its fellow safe haven.

“We end the week with risk flying. Equities are going up hard, and the yen has no place as a hedge,” because it would just drag on overall portfolio performance, Pepperstone head of research Chris Weston said in a note.

The U.S. currency had rallied since early September 2021 on expectations the Fed would begin asset tapering earlier than expected as the economic recovery from COVID-19 continues and energy prices continue to climb.

Minutes from the central bank’s latest meeting that took place on Wednesday said that that asset tapering is likely to begin in November 2021 but that officials remain sharply divided over inflation. Money markets are now pricing in about 50/50 odds of a 25-basis point rate hike by July 2022.

The dollar index is “looking a little shaky, but any slippage should prove modest” with Fed asset tapering now imminent, Westpac strategists said in a note. Any dips in the index should be limited to 93.70, the note added.

U.S. data, including retail sales as well as the University of Michigan consumer sentiment and Michigan consumer expectations indexes, will be released later in the day. This follows data released on Thursday that showed that the producer price index rose 0.5% month-on-month in September, and a lower-than-expected 293,000 initial jobless claims were filed throughout the week.

Dollar Loses Ground Against Other Currencies Following Inflation Data

The dollar slide continued Wednesday following consumer price index data that showed a continued rise in prices, increasing market expectations for a potential rate hike. 

The inflation rate for September was reported at 0.4%, coming in above the expected 0.3% figure. The year-on-year inflation rate rose to 5.4%, again beating expectations of 5.3%.

The news has seen the dollar weaken against all of the other major currencies on Wednesday, with the dollar index, which measures the currency against a basket of foreign currencies, falling over 0.4% and moving lower from the 13-month high it posted earlier this week.

At the time of writing, the major FX pairs show the AUD/USD, which is closely linked to commodities, trading 0.37% above Tuesday’s close. XAU/USD has climbed close to 2%.

The GBP/USD has posted a 0.44% gain, despite issues surrounding Brexit and the Northern Ireland protocol.

The euro is up over 0.5% against the greenback, retracing significantly since it fell to 15-month lows. 

Elsewhere, the USD/CAD is down 0.18%, the USD/CHF is down 0.58%, the USD/JPY is down 0.16% and the NZD/USD is up 0.45%. Despite the minutes of the Federal Reserve’s recent meeting showing the central bank could taper bond purchases in mid-November or mid-December, we have yet to see a strong reaction in the dollar crosses.