Investors continue to evaluate the direction of Federal Reserve policy and whether aggressive rate rises will cause a recession; hence, the U.S. dollar fell versus its main counterparts on Friday, setting the stage for its first weekly fall this month.
Along with rising regional stock markets and the support of riskier currencies like the Australian and New Zealand dollars, the safe-haven currency lost favor. In Asia, the dollar index, which compares the dollar value to six competing currencies, fell 0.2 percent to 104.19. That reversed the 0.19 percent increase from the day before; which was mostly due to a drop in the euro after disappointing European industrial data lowered expectations for ECB tightening. In a client note, Westpac analysts said of the dollar index that recession talk had disrupted the DXY uptrend. Still, they don’t think retracements have legs beyond the low 102s.
Fed Funds should surpass 3 percent by the end of the year; therefore, support for USD interest rates should eventually continue to increase. The Eurozone is currently experiencing increased material hardship due to stagflation, and the ECB is battling to control peripheral spreads. The markets are now relying on more cautious policy action from the Fed following another anticipated 75 basis point rate hike in July; which has caused bumpy dollar trading this week. Over the same period, the dollar index has decreased by 0.42 percent. Michelle Bowman, the Fed governor, stated on Thursday that she favors 50 basis point increases for the next several sessions following the one in July. In the meanwhile, Fed Chair Jerome Powell emphasized the institution’s unconditional dedication to containing inflation during his second day of congressional testimony.
Fears of a recession dampened Treasury yields overnight; eliminating crucial support for the currency and sending the yield on the 10-year note to a two-week low. [U.S./] The dollar weakened 0.2 percent to 134.66 against the yen, which is quite sensitive to movements in U.S. rates.
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