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Quo Vadis Dollar?


Last week, markets received the good news anticipated for long – a confirmation from Chair Jerome Powell that it made sense for the Fed to moderate the pace of its rate increases. While speaking at the Brookings Institution, Washington on November 30, the Fed Chair also hinted that the time for moderating the pace of rate increases could come as soon as the December meeting.

Markets worldwide rallied and the Dollar languished. Between the last Friday of November and the first Friday of December, the Dollar Index (DXY) – a measure of the Dollar’s strength against a basket of 6 currencies dropped from 105.96 to 104.54, a 5-month low. Markets apparently priced in the assessment that the Dollar’s strength would predominantly lie in the Fed’s resolve to raise rates further and faster.

Friday’s non-farm payrolls data showed an addition of 263 thousand jobs in the month of November, versus expectations of 200 thousand, and implying a resilient jobs market. The reading provided a short-lived spike to the Dollar, with the DXY since plunging to 104.25.

The EUR/USD which had opened at 1.0382 on November 28 dropped to a low of 1.0289 on November 30, ahead of the speech by Powell. By Friday, the pair soared to a high of 1.0546, for the first time in five months, with the greenback retreating against major currencies as hopes of a Fed pivot were reinforced. Despite the Euro Area facing the twin challenges of persistently high inflation and recessionary economic conditions, the Euro is holding on to recent gains against the Dollar. The pair is currently at 1.0567.
Likewise for GBP/USD. The pair which opened on November 28 at 1.2078 dropped to as low as 1.1899 amidst typical nervousness ahead of Fedspeak. Post the Fed Chair’s speech, the pair rose to 1.2312 before finally ending Friday’s trade at 1.2287. The pound is currently at $1.2271.

The USD/JPY pair which opened on November 28 at 139.34, finished the week’s trading at 134.30 as the indications of a monetary policy softening from the Fed, lifted the Yen. The USD/JPY pair is currently at 135.56.
The Yuan too strengthened against the Dollar amidst hopes of an easing in China’s Covid curbs. The USD/CNY pair which opened the week ended December 2 at 7.2281 increased to 7.2399 before finishing at a low of 7.0190. The Yuan has since appreciated past 7 per dollar, hovering near 6.95.

The ISM Non-Manufacturing PMI data. for November, which is expected to reveal a slowing down in the services sector, and the producer price inflation data which is seen steady in the month of November are key data highlights in the coming week from the U.S.

But would the Dollar be solely Fed-led? The answer is a simple negative.

The Dollar’s trajectory in the days ahead would be determined not just by the monetary policy dynamics of the Fed but also by the economic outlook and the triggers for monetary policy tightening in regions beyond the U.S. The inflation updates from China, Brazil, Turkey, Russia, Philippines, Netherlands and Mexico as well as the review of interest rates by central banks in Australia, Canada, Brazil and India would be keenly watched in this context.

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