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.