Dollar Climbs as Evergrande Uncertainty Percolates

China Evergrande Group owes $305 billion and has run short on cash, missing a Thursday deadline for paying $83.5 million and leaving investors questioning whether it will make the payment before a 30-day grace period expires. A collapse of the company could create systemic risks to China’s financial system.

The safe-haven dollar had its biggest one-day percentage drop in about a month on Thursday after Beijing injected new cash into the financial system and Evergrande announced it would make interest payments on an onshore bond, boosting risk sentiment.

The offshore Chinese yuan weakened versus the greenback at 6.4641 per dollar.

The decline came a day after the greenback was lifted by Wednesday’s announcement from the U.S. Federal Reserve that it will likely begin to trim its monthly bond purchases as soon as November and flagged interest rate increases may follow suit sooner than expected as the central bank moves away from its pandemic crisis policies.

“We are in one of the situations, and this doesn’t always happen, where the dollar is the beneficiary of multiple ideas,” said Joseph Trevisani, senior analyst at FXStreet.com.

“The U.S. economy does look better than most of its competitors, there is lingering fear out there over Evergrande and what else is out there in the rather untransparent Chinese economy and political system, plus the Fed appears finally ready.”

The dollar index rose 0.237%, with the euro down 0.2% to $1.1713.

Kansas City Fed President Esther George said the U.S. labor market has already met the central bank’s test to pare its monthly bond purchases, and the discussion should now turn to how its massive bondholding could complicate the decision on when to hike rates.

Cleveland Fed President Loretta Mester echoed the sentiment for a tapering this year, and said the central bank could start raising rates by the end of next year should the job market continue to improve as expected.

In prepared remarks in a listening session with a wide swath of economic players, Fed Chair Jerome Powell did not elaborate on his own economic or monetary policy outlook, which he had outlined at the close of the two-day Fed meeting on Wednesday.

Sterling weakened a day after hawkish comments from the Bank of England on Thursday pushed the pound to its biggest one-day percentage gain since Aug. 23.

The Japanese yen weakened 0.43% versus the greenback at 110.77 per dollar, while Sterling was last trading at $1.3666, down 0.36% on the day.

Cryptocurrencies slumped after China’s most powerful regulators increased the country’s crackdown on the digital assets, with a blanket ban on all crypto transactions and crypto mining.

Bitcoin, the world’s largest cryptocurrency, last fell 5.89% to $42,256.47.

Smaller coins, which generally move in tandem with bitcoin, also dropped. Ether last fell 8.08% to $2,899.10 while XRP last fell 7.2889413% to $0.93.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Chuck Mikolajczak; Editing by Dan Grebler and Sonya Hepinstall)

Dollar Slumps as Risk Appetite Rebounds

Investors’ risk appetite improved after Beijing injected fresh cash into its financial system ahead of an $83.5 million bond coupon by embattled property giant Evergrande, at risk of becoming one of the world’s largest-ever corporate defaults.

Worries about Evergrande’s payment obligations and what systemic risks to China’s financial system the property giant’s difficulties pose have weighed on global financial risk sentiment in recent sessions.

“Commodity currencies are broadly higher while havens are weaker, leaving the USD trading generally lower after a firm close following the FOMC (Federal Open Market Committee),” Shaun Osborne, chief currency strategist at Scotiabank, said in a note.

The U.S. Dollar Currency Index, which measures the greenback against a basket of six rivals, was 0.5% lower at 93.037. The index, which had risen 0.25% on Wednesday, was on pace for its biggest daily percentage drop in a month but remains close to the near 10-month high touched in late August.

The offshore Chinese yuan strengthened versus the greenback at 6.4599 per dollar.

The dollar found little support from data that showed the number of Americans filing new claims for jobless benefits unexpectedly rose last week amid a surge in California.

Thursday’s improved mood boosted risk-sensitive commodity currencies, with the Australian dollar rising 0.9% and the New Zealand dollar up 1.0%.

The improved risk-appetite was reflected in Wall Street’s major equity indexes, with the S&P 500 on track for a gain of more than 1% and its largest two-day percentage gain since late July.

On Wednesday, the Federal Reserve said it will likely begin reducing its monthly bond purchases as soon as November and signaled interest rate increases may follow more quickly than expected.

While positive for the dollar, the boost from the Fed’s announcement was undercut by hawkish messages from several central banks in Europe, and as Norway became the first developed nation to raise rates.

Norway’s crown jumped to a 3-1/2 month high versus the euro on Thursday after the central bank raised its benchmark interest rate and said more hikes will follow in the coming months.

Sterling extended its rise on Thursday after the Bank of England said two of its policymakers had voted for an early end to pandemic-era government bond buying and markets brought forward their expectations for an interest rate rise to March.

In emerging markets, the Turkish lira plummeted to a record low after a surprise interest rate cut of 100 basis points to 18% that came despite inflation hitting 19.25% last month

Meanwhile, bitcoin extended its recovery from a sharp fall earlier this week, rising 2.42% to a 3-day high of $44,642.78.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Saqib Iqbal Ahmed and Chuck Mikolajczak; Additional reporting Sujata Rao and Saikat Chatterjee in London and Tom Westbrook in Singapore; Editing by Bernadette Baum, Will Dunham and Hugh Lawson)

Marketmind: E-Day and Central Banks Galore

A look at the day ahead from Karin Strohecker.

Whether or not the payment is made, few harbour hopes that China’s overextended property sector – a dominant force in Asia’s corporate bond market – will escape disruption. In turn the hit to the country’s financial system, commodity imports and economic growth is bound to be felt globally.

And there’s little solace to be had from a more hawkish Fed, likely beginning to trim its monthly bond purchases as soon as November. At the end of two-day meeting on Wednesday, the Fed also signalled interest rate increases may follow more quickly than expected as its turn from pandemic crisis policies gains momentum.

Autumn storm clouds are also gathering elsewhere with the U.S. debt ceiling nearing and the flu season approaching fast in many parts of the world.

But for today, optimism prevails.

Evergrande shares rose as much as 32% in Hong Kong after its chairman sought to reassure retail investors, many Asian markets are trending higher. Both European and U.S. stocks futures point to cautious gains with crude oil futures rising and the dollar taking a breather.

The central banking marathon continues with policy makers in the U.K., Switzerland, South Africa, Turkey and Norway all due to give their verdict. Norway is set to become the first major western central bank to deliver post-pandemic rate hikes.

Data on PMIs coming in from around the globe meanwhile should give markets more hints to gauge the economic trajectory ahead.

Key developments that should provide more direction to markets on Thursday:

– Evergrande seeks to reassure retail investors as key debt deadline looms

– Central banks: Norway, UK, Switzerland, South Africa, Turkey, Taiwan, Philippines

– Bank of England expected to keep rates steady as inflation risks mount

– Fed issues quarterly accounts

– U.S. weekly initial jobless claims

– Auctions: US 4 week bills, 10-yr TIPS

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Karin Strohecker, editing by Dhara Ranasinghe)

Fed Signals Bond-Buying Taper Coming ‘soon,’ Rate Hike in 2022

The moves, which were included in the Fed’s latest policy statement and separate economic projections, represent a hawkish tilt by a central bank that sees inflation running this year at 4.2%, more than double its target rate, and is positioning itself to act against it.

That action may proceed slowly, with interest rates seen rising to 1% in 2023, faster than projected by the Fed in its projections in June, and then to 1.8% in 2024, which would still be considered a loose monetary policy stance.

Inflation throughout that time would be allowed to run slightly above the Fed’s 2% target, consistent with its new, more tolerant approach to the pace of price increases, while unemployment is seen falling back to around the pre-pandemic level of 3.5%. Policymakers also downgraded their expectations for economic growth this year, with gross domestic product expected to grow 5.9% compared to the 7.0% projected in June.

Still, the shift shows movement among policymakers divided over whether the coronavirus pandemic’s ongoing impact on the economy or the threat of breakout inflation constitutes the bigger risk.

While no decisions have been made on the exact pace and timing of how the central bank will reduce its asset purchases, Fed Chair Jerome Powell said it seems “appropriate” that the taper could begin “soon” and be completed by the middle of 2022.

“Participants generally view that as long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate,” he said in a news conference after the end of the Fed’s latest two-day policy meeting.

Powell told reporters financial conditions would remain accommodative even after the Fed stops purchasing Treasuries and mortgage-backed securities and emphasized that the decision on the bond-buying program was separate from any actions regarding interest rates.

The Fed on Wednesday held its current target interest rate steady in a range of 0% to 0.25%.

“It’s probably a little bit more hawkish than many would have anticipated basically acknowledging that should the economy continue to grow as we have seen it would warrant a tapering to occur,” said Sam Stovall, chief investment strategist for CFRA Research in New York. “You could say it’s a tentative tapering announcement even though they did lower their 2021 GDP forecast.”

U.S. stocks extended gains after the release of the statement before retreating slightly during Powell’s news conference, with the S&P 500 index up 1.2% on the day. The dollar rose while the yield on the U.S. 10-year Treasury note edged lower.

SLOWING RECOVERY

Though acknowledging the new surge of the pandemic had slowed the recovery of some parts of the economy, overall indicators “have continued to strengthen,” the central bank’s policy-setting Federal Open Market Committee said in its unanimous policy statement.

If that progress continues “broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” it said.

The statement had been widely expected to signal that the Fed would soon begin winding down the $120 billion in monthly bond purchases it has been making to blunt the economic impact of the pandemic.

Fed officials said last December that they would continue purchasing bonds at the current pace until there was “substantial further progress” on the central bank’s goals for maximum employment and inflation.

Powell on Wednesday said officials could decide as soon as the next policy meeting in November that both of those standards have been met, based on what happens with the labor market and the broader economy, and make a decision on whether to taper.

But it was in their broader economic outlook that Fed policymakers made a less anticipated change.

The outlook for inflation jumped 0.8 percentage point for 2021 and the unemployment rate seen at the end of this year rose. In turn, two officials brought forward into 2022 their projected timeline for slightly lifting the Fed’s benchmark overnight interest rate from the current level, enough to raise the median projection to 0.3% for next year.

The move to lower GDP growth expectations for 2021 reflected concerns that the coronavirus is weighing on the economy.

“The sectors most adversely affected by the pandemic have improved in recent months, but the rise in COVID-19 cases has slowed their recovery,” the Fed said in its policy statement.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Howard Schneider; Additional reporting by Jonnelle Marte and U.S. Finance and Markets Breaking News teamEditing by Paul Simao)

FOMC Teases Start of Taper “soon”

The actions, which were included in the Fed’s latest policy statement and separate economic projections, represent a hawkish tilt by a central bank that sees inflation running this year at 4.2%, more than double its target rate, and is positioning itself to act against it.

The current target interest rate was held steady in a range of 0% to 0.25%.

In a press conference after the statement Fed Chair Jerome Powell elaborated that if the economy continues to improve the FOMC could easily move ahead with tapering at the next meeting in November. The bar for lifting rates from zero is much higher than for tapering, he said.

STOCKS: The S&P 500 briefly extended a rally and was last unchanged from before the statement up 0.95%

BONDS: The 10-year U.S. Treasury note yield seesawed and was last up at 1.3226% and the 2-year yield firmed to 0.2342%

FOREX: The dollar index turned 0.2% firmer

COMMENTS

LAWRENCE GILLUM, FIXED INCOME STRATEGIST, LPL FINANCIAL, FORT MILL, SOUTH CAROLINA

“There are some notable takeaways. The divergence of views within the committee is interesting. We’re seeing a 50-50 split in terms of rate hikes in 2022. There’s just a big divergence of opinions on rate hikes and even further into 2023, a big range of potential Fed Fund target rates.

“The Fed did talk about potentially moderating its asset purchases soon, that’s setting up the committee to announce tapering in November, with a decision to actually taper coming in December. The Fed has made progress in that taper timeline and we think that will likely take place this year.”

“The other takeaways were the adjustments to the summary of economic projections. Inflation expectations have move higher for a touch longer than they originally thought, and then those growth expectations have come down a touch as well.”

JOE MANIMBO, SENIOR MARKET ANALYST, WESTERN UNION BUSINESS SOLUTIONS, WASHINGTON

“Very mixed signals from the Fed, resulting in the dollar’s choppy performance. Once the dust settles it seems that there are enough hawkish signals to keep the dollar biased higher, as the market pencils in a sooner-than-expected rate hike. Inflation also continues to trend higher. And although the Fed marked down its forecasts for growth and unemployment, it still has robust expectations for the economy.”

KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CAMBRIDGE GLOBAL PAYMENTS, TORONTO

“Markets initially read the statement as hawkish, but that reaction is fading out as traders read more deeply into the Statement of Economic Projections. Fed officials acknowledged making ‘substantial further progress’ toward the central bank’s inflation goal, and demonstrated confidence in the labor market meeting that test by the end of the year.

“The FOMC warned markets of an imminent tapering decision, saying that a ‘moderation in the pace of asset purchases may soon be warranted’ if  economic conditions continue to evolve as expected.

“A record number of participants are worried about upside risks on the inflation front, suggesting that the central bank could move aggressively if price growth remains elevated into the early part of next year.”

“Officials are now deadlocked on raising rates in 2022, but the median forecast is for a 1% Fed funds rate in 2023, and only 1.8% by the end of 2024. This is not rapid tightening by any means – it’s slightly slower than the 25-basis-point-per-quarter pace seen in previous cycles.

“This could also mean that estimates of the ‘terminal rate’ at the end of the cycle have been lowered. This is dovish, and will be welcomed in financial markets. The dollar could tumble from here, particularly if Powell follows prior patterns and tramples on the dot plot during the presser.”

SAM STOVALL, CHIEF INVESTMENT STRATEGIST, CFRA Research, NEW YORK

“It’s probably a little bit more hawkish than many would have anticipated basically acknowledging that should the economy continue to grow as we have seen it would warrant a tapering to occur. You could say it’s a tentative tapering announcement even though they did lower their 2021 GDP forecast.”

“The reason the Fed is tapering is because the economy and corporate earnings are strong enough to withstand it. So investors are basically saying let’s buy equities because the economy is strong and the Fed won’t be raising rates until a year plus from now.”

“The Fed is not going to get behind the curve and won’t have to end up surprising us by raising rates much more quickly than currently anticipated.”

JOHN CANAVAN, LEAD ANALYST, OXFORD ECONOMICS, NEW YORK

“Basically what we’re seeing here is a (U.S. Treasury yield) curve flattening shift in response to the summary of economic projections pulling forward Fed rate hikes. The Fed is now projecting a rate hike in 2022 as their median forecast, which is up from steady in the July summary of economic projections. As a result, what we’re seeing is a little bit of pressure on the front end (of the curve), while the long end views the slightly more hawkish Fed as a positive sign for keeping inflation in check along with some potential risk of the Fed moving too quickly and acting to slow the economy in the coming years.”

“We have seen a bit of an acceleration in the curve flattening based on the view that we’ve seen peak inflation and some of the risks related to the slowing economy in the third quarter.”

STEVEN VIOLIN, PORTFOLIO MANAGER, F.L.PUTNAM INVESTMENT MANAGEMENT COMPANY, WELLESLEY, MASSACHUSETTS

“It is an interesting point in time here, the tapering of quantitative easing seems very likely now in November but this was something of a given and remains couched in a lot of qualifying criteria in the event that various risks emerge, whether it is the debt ceiling debate, COVID outlook, the China property market intervening. The increase in the Fed’s projections in future interest rates though seems to be more what has caught the market by surprise at the margin, it is still consistent with our view that the Fed is likely to continue allowing inflation to run hot and remain anchored in the same measured pace as prior cycles. It really only increases the inflation risk that we have been taking seriously as we see some of the supply chain and labor shortages clearly not resolving with the end of unemployment benefits. Longer-term there is a lot of powerful disinflationary forces but for the moment they are clearly being offset and the risk is that becomes entrenched in consumer expectations.”

“For the moment, the markets seem to be taking this in stride with a relatively positive reaction from the stock market and from longer-term bonds, as far as the inflation outlook goes, I’m not sure this is a positive development.”

“It is also the measured pace, some increase in the dots was expected by the market and priced in to some extent but there wasn’t any acceleration, in fact there is a deceleration, which indicates perhaps some members of the committee have revised lower their terminal rate, it is hard to know, but the current dots as they are showing fewer increases in the out years and this is the first look we have gotten in the 2024 projections. So that is a notable development that perhaps is what is driving the positive response in longer-term interest rates and the shifts in currency markets.”

TOM GARRETSON, SENIOR PORTFOLIO STRATEGIST, RBC WEALTH MANAGEMENT, MINNEAPOLIS

“Across the board it’s exactly what we were expecting, the Fed took another step towards a formal taper announcement, and that’s probably going to come at the next meeting or two.

“The key behind the potential rate hike was the upgrade to their inflation outlook. There are signs inflationary pressures are going to be transitory, but they are more persistent than expected. That’s the key driver as to why the balance has shifted to a potential rate hike in 2022 as opposed to 2023.

“We’re watching yield curves flatten. The Treasury market’s interpreting it as a hawkish surprise.

“It was very inline with expectations. Powell will use the press conference to reiterate to the idea that tapering is coming in the several months. It’s what I expected, not too hawkish and not too dovish.”

JOSEPH LAVORGNA, AMERICAS CHIEF ECONOMIST, NATIXIS, NEW YORK

“Unless we know who is who, which we don’t, I’m not sure the dot-plot accurately reflects the Fed’s thinking. I don’t think the Fed’s tightening is going to be anywhere near as hawkish as they anticipate. It’s going to be hard for them to execute on this plan as the economy slows next year.”

For a look at all of today’s economic events, check out our economic calendar.

(Compiled by the U.S. Finance & Markets Breaking News team)

Dollar Choppy After Fed Statement, Evergrande Exhale Lifts Risk-Sensitive Currencies

The Federal Reserve on Wednesday cleared the way to reduce its monthly bond purchases “soon” and signaled interest rate increases may follow more quickly than expected, with half of the 18 U.S. central bank policymakers projecting borrowing costs will need to rise in 2022.

“The tapering of quantitative easing seems very likely now in November but this was something of a given and remains couched in a lot of qualifying criteria in the event that various risks emerge, whether it is the debt ceiling debate, COVID outlook, the China property market intervening,” said Steven Violin, portfolio manager at F.L.Putnam Investment Management Company in Wellesley, Massachusetts.

The dollar index rose 0.094%, alternating between gains and declines after the announcement, with the euro down 0.1% to $1.1711.

Property giant and Asia’s biggest junk bond issuer Evergrande said it “resolved” one payment due on Thursday via a private negotiation, easing concerns of default and possible contagion risk, while the People’s Bank of China injected 90 billion yuan into the banking system to support markets.

“Being able to make tomorrow’s bond coupon payment, that definitely lifted risk sentiment overnight and you saw a typical follow-through reaction in risk currencies, so Canadian dollar high, Aussie dollar higher, Kiwi dollar higher – that was kind of an understandable reaction,” said Erik Bregar, an independent FX analyst in Toronto.

Still, uncertainty remains whether the developer will be able to pay the coupon on its offshore dollar bonds, due on Thursday.

The Australian dollar rose 0.33% versus the greenback to $0.726 after rising as much as 0.49% to $0.7268 while the Canadian dollar rose 0.58% versus the greenback to 1.27 per dollar.

The offshore Chinese yuan strengthened versus the greenback to 6.4628 per dollar.

The safe-haven Japanese yen weakened 0.50% versus the greenback to 109.78 per dollar in the wake of the Bank of Japan’s decision to keep policy on hold.

Sterling was last trading at $1.3637, down 0.16% on the day ahead of a policy announcement by the Bank of England on Thursday, with expectations for a rate hike being pushed down the road by investors.

In cryptocurrencies, Bitcoin last rose 6.93% to $43,409.48 following three straight days of declines.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Chuck Mikolajczak; Editing by Will Dunham and Andrea Ricci)

Dollar Eases From Near 1-Month High as Fed, Evergrande Eyed

After reaching its highest level since Aug. 23 on Monday, the dollar straddled around the unchanged mark on the day, briefly moving higher as early gains on Wall Street’s benchmark equity indexes faded.

Investors are looking toward the Fed’s policy announcement on Wednesday for any signs of when the central bank will begin to scale back its massive bond-buying program, in a week filled with policy statements expected from a host of central banks around the globe.

“The market was trying to get a sense of was this turnaround Tuesday going to last, and if we had that continued improvement of risk appetite the dollar was going to pull back even more here,” said Edward Moya, senior market analyst at OANDA in New York.

“But there is just a lot of wait-and-see as far as what is going to happen with the Fed, what is going to happen with Evergrande. And right now if you are trying to make a dollar bet you really just want to wait until you get a better sense of what is going to happen with Evergrande and what the Chinese government is going to do.”

The dollar index fell 0.019% after reaching a high of 93.455 on Monday, while the euro was down 0.01% to $1.1724.

The greenback strengthened on Monday, along with other safe-havens such as the yen and Swiss franc, as concerns about the fallout from the possible default of China Evergrande unnerved financial markets.

Those concerns overshadowed efforts by Evergrande’s chairman to lift confidence in the embattled firm on Tuesday, as Beijing showed no signs it would intervene to stem any domino effects across the global economy.

The offshore Chinese yuan weakened versus the greenback to 6.4817 per dollar.

Before Evergrande’s debt crisis rattled markets, the dollar had been supported ahead of the Fed meeting this week, with economists surveyed in a Reuters poll expecting policymakers to signal expectations of a tapering plan to be pushed back to November.

The Japanese yen strengthened 0.13% versus the greenback, to 109.23 per dollar, while Sterling was last trading at $1.3658, up 0.01% on the day.

The Canadian dollar was poised to halt three straight days of declines against the greenback, after Canadian Prime Minister Justin Trudeau was re-elected to a third term but failed to win a majority in the parliamentary elections.

The Canadian dollar rose 0.06% versus the greenback at 1.28 per dollar.

In cryptocurrencies, bitcoin last fell 2.01% to $42,172.11.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Chuck Mikolajczak; Editing by Andrea Ricci and Leslie Adler)

Analysis: Why the Fed Might Welcome a Bond Market Tantrum

Persistently low yields are a feature of bond markets across the developed world, with central banks mostly in no hurry to raise interest rates and a global savings glut that keeps debt securities in constant demand.

But it is in the United States that the contradiction between economic recovery and bond yields is starkest.

Even with growth tipped to surpass 6% this year and a “taper” in sight for the Fed’s bond-buying programme at the end of this year, 10-year yields are still stuck at just above 1.3%..

The Fed probably rejoiced at low yields in the initial stages of the economic recovery, but now needs bonds to respond to the end of pandemic-linked recession, said Padhraic Garvey, head of research for the Americas at ING Bank.

Current pricing, analysts say, looks more consistent with heightened economic uncertainty, whereas higher yields would align markets more with the signals coming from central banks.

“To facilitate that, we argue that there needs to be a tantrum. If the Fed has a taper announcement … and there is no tantrum at all, that in fact is a problem for the Fed,” ING’s Garvey said.

Analysts say a bond market tantrum would involve yields rising 75-100 basis points (bps) within a couple of months.

The original “taper tantrum” in 2013 boosted U.S. yields just over 100 bps in the four months after then Fed boss Ben Bernanke hinted at an unwinding of stimulus measures.

But that kind of sudden jump in yields looks unlikely right now, given how clearly the Fed has telegraphed its plans to taper its bond-buying. And as 2013 showed, bond market tantrums carry nasty side-effects including equity sell-offs and higher borrowing costs worldwide.

A happy medium, analysts say, might be for benchmark yields to rise 30-40 bps to 1.6-1.8%

FED AND BANKS NEED AMMUNITION

Besides wanting higher yields to better reflect the pace of economic growth, the Fed also needs to recoup some ammunition to counter future economic reversals.

The Fed funds rate – the overnight rate which guides U.S. borrowing costs – is at zero to 0.25%, and U.S. policymakers, unlike the Bank of Japan and the European Central Bank, are disinclined to take interest rates negative.

The Fed won’t want to find itself in the position of the ECB and BOJ, whose stimulus options at the moment are limited to cutting rates further into negative territory or buying more bonds to underwrite government spending.

Jim Leaviss, chief investment officer at M&G Investments for public fixed income, said policymakers would probably like the Fed fund rate to be at 2%, “so, when we end up in the next downturn, the Fed will have some space to cut interest rates without hitting the lower bound of zero quickly”.

Another reason higher yields might be welcomed is because banks would like steeper yield curves to boost the attractiveness of making longer-term loans funded with short-term borrowing from depositors or markets.

Thomas Costerg, senior economist at Pictet Wealth Management, notes that the gap between the Fed funds rate and 10-year yields of about 125 bps now is well below the average 200 bps seen during previous peaks in economic expansion.

He believes the Fed would favour a 200 bps yield slope, “not only because it would validate their view that the economic cycle is fine but also because a slope of 200 bps is healthy for the banking sector’s maturity transformation.”

GRAVITATIONAL FORCE

But even a tantrum might not bring a lasting rise in yields.

First, while the Fed may look with envy at Norway and New Zealand where yields have risen in expectation of rate rises, it has stressed that its own official rates won’t rise for a while.

Structural factors are at play too, not least global demand for the only large AAA-rated bond market with positive yields.

The Fed also, in theory at least, guides rates towards the natural rate of interest, the level where full employment coincides with stable inflation.

But this rate has shrunk steadily. Adjusted for projected inflation, the “longer-run” funds rate – the Fed’s proxy for the natural rate – has fallen to 0.5% from 2.4% in 2007. If correct, it leaves the Fed with little leeway.

Demographics and slower trend growth are cited as reasons for the decline in the natural rate though a paper https://bit.ly/3nVMxMv presented last month at the Jackson Hole symposium also blamed a rise in income inequality since the 1980s.

The paper said the rich, who are more likely to save, were taking a bigger slice of overall income and the resulting savings glut was weighing on the natural rate of interest.

“One lesson from this year is that there is massive gravitational force, a price-insensitive demand which is pressing down on Treasury yields,” Pictet’s Costerg said.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Stefano Rebaudo; Additional reporting by Dhara Ranasinghe in London and Dan Burns in New York; Editing by Sujata Rao and David Clarke)

 

Dollar Touches Three-Week High, Lifted by Recent Data, Fed Taper View

The dollar index, a gauge of the greenback’s value against six major currencies, rose to 93.220, the highest since the third week of August. It was last up 0.4% at 93.207.

For the week, the dollar index gained 0.6%, its largest weekly percentage rise since mid-August.

The Fed holds a two-day monetary policy meeting next week and is expected to open discussions on reducing its monthly bond purchases, while tying any actual change to U.S. job growth in September and beyond.

“While we doubt that the FOMC will set out a plan for tapering its asset purchases, the new economic projections may shed some light on its reaction function given building cyclical inflationary pressures,” wrote Jonathan Petersen, markets economist at Capital Economics, in its latest research note.

“Our view remains that inflation in the U.S. will stay elevated for longer than the FOMC and investors currently anticipate, in turn supporting higher U.S. yields and a stronger dollar,” he added.

Speculation about a Fed taper this year gathered pace after U.S. retail sales unexpectedly increased in August, data showed on Thursday, rising 0.7% from the previous month despite expectations of a 0.8% fall. A business sentiment survey also showed a big improvement.

In afternoon New York trading, the euro slid 0.3% to $1.1729, after hitting a three-week low of $1.1724 earlier in the session.

The University of Michigan consumer sentiment for September inched higher to 71 versus the final August reading of 70.3, but overall analysts said the rise was nowhere near the improvements seen in the Empire States and Philadelphia Fed manufacturing surveys.

The dollar held gains after the Michigan sentiment report.

Currency markets were generally quiet on Friday with traders reluctant to take on new positions ahead of a clutch of important central bank meetings next week including the Fed, the Bank of Japan and the Bank of England.

The dollar was up 0.5% against the Swiss franc at 0.9320 francs, after earlier hitting a five-month high of 0.9324 francs .

The dollar rose 0.2% to 109.92 yen.

The yen has shown limited reaction to the ruling Liberal Democratic Party’s leadership race, which formally kicks off on Friday ahead of a Sept. 29 vote. The LDP’s parliamentary dominance means the party’s new leader will become prime minister.

The dollar also rose to a two-week high against the offshore yuan and was last up 0.3% at 6.4711. The yuan is being pressured by growing worries about China’s real estate sector as investors fear property giant China Evergrande could default on its coupon payment next week.

The British pound fell 0.4% to $1.3738 as UK retail sales undershot expectations. However, with investors bringing forward forecasts for a Bank of England interest rate hike to mid-2022, sterling remains supported.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Muralikumar Anantharaman, Alex Richardson and Sonya Hepinstall)

Dollar Index Climbs After U.S. Retail Sales Show Surprise Rebound

The dollar index, which measures the U.S. currency against six others, added to gains following the report and was last up 0.5% at 92.866. It hit its highest level since Aug. 27.

Retail sales rose 0.7% last month, boosted in part by back-to-school shopping and child tax credit payments, while data for July was revised down.

A separate report showed U.S. initial claims for state unemployment benefits increased 20,000 to a seasonally adjusted 332,000 for the week ended Sept. 11. Economists had forecast 330,000 applications for the latest week.

“If you look at the retail sales number, it’s quite constructive even with the revisions, so we are seeing the dollar benefit from that, particularly against the funding currencies like the euro, Swiss and the yen,” said Bipan Rai, North American head of FX strategy for CIBC Capital Markets in Toronto.

The news could bolster investor expectations for next week’s Federal Reserve policy meeting and how soon the U.S central bank will start to taper stimulus.

“It feels like whatever lingering concerns there were with the underlying economy … that was kind of washed away a little bit. So as we move towards the Fed next week, the evidence backs up the idea that we’re going to get a taper signal from the Fed at the meeting,” he said.

On Tuesday, the dollar index fell to a one-week low of 92.321 after a softer-than-expected inflation report. Its low for the month was 91.941, on Sept. 3, when payrolls data disappointed.

Investors are looking for clarity on the outlook for both tapering and interest rates at the Fed’s two-day policy meeting that ends next Wednesday.

Tapering typically lifts the dollar as it suggests the Fed is one step closer to tighter monetary policy.

It also means the central bank will be buying fewer debt assets, in effect reducing the amount of dollars in circulation, which in turn lifts the currency’s value.

The dollar also gained 0.3% to 109.70 yen , after sliding to a six-week low of 109.110 in the previous session.

The euro was 0.4% lower at $1.1766.

The Swiss franc also fell against the dollar and was last at 0.9263 franc per dollar.

Elsewhere, the Australian dollar was down 0.5% at $0.7296.

Earlier, data showed the country’s jobless rate unexpectedly fell to 4.5%, but the statistics bureau said the change reflected a drop in the participation rate rather than a strengthening of the labor market.

In cryptocurrencies, moves in bitcoin were relatively subdued. It was last down 0.9% at $47,711. Ether changed hands at $3,589, down 0.7%.

AMC Entertainment Holdings Inc boss Adam Aron said in a tweet this week that the theater chain would accept ether, bitcoin cash and litecoin alongside bitcoin for ticket purchases.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Caroline Valetkevitch; Additional reporting by Ritvik Carvalho in London and Kevin Buckland in Tokyo; Editing by Alexander Smith, Mark Potter and Jonathan Oatis)

 

Dollar Falters After U.S. Inflation Rise Eases, Safe-Haven Yen, Franc Up

Several Fed officials have suggested the U.S. central bank could reduce its buying of debt securities by the end of the year, but said an eventual interest rate hike would not happen for some time.

The Fed will hold a two-day monetary policy meeting next week, with investors keen to find out whether a tapering announcement will be made.

Tapering tends to benefit the dollar as it suggests the Fed is one step closer toward tighter monetary policy. It also means the central bank will be buying fewer debt assets, effectively reducing the number of dollars in circulation.

Data on Tuesday showing the U.S. consumer price index, excluding the volatile food and energy components, edged up just 0.1% last month has raised doubts about tapering this year, some analysts said.

August’s core CPI rise was also the smallest gain since February and followed a 0.3% rise in July. The so-called core CPI increased 4.0% on a year-on-year basis after gaining 4.3% in July.

“The softer inflation prints caused investors to push back on bets that the Fed could move sooner to taper bond purchases. Easing inflation would take the heat off the Fed to move prematurely,” said Fiona Cincotta, senior financial markets analyst at City Index.

She also cited U.S. core producer prices (PPI) data for August released last week, which also rose at a slower pace. Excluding the food, energy and trade services elements, producer prices rose 0.3% last month, the smallest gain since last November. The so-called core PPI shot up 0.9% in July.

“So the evidence does appear to be building that peak inflation has passed. That said, supply chain bottlenecks are expected to persist for a while so it’s unlikely that either PPI or CPI will drop dramatically or rapidly,” Cincotta added.

In afternoon trading, the dollar index was slightly down at 92.601, moving away from a more than a two-week high on Monday.

The euro was flat against the dollar at $1.1807.

Risk appetite soured on Tuesday as well, with Wall Street shares down while U.S. Treasury prices were up sharply, pushing yields lower.

Investors looked past decelerating inflation and focused on uncertainties about U.S. growth now clouded by the economic impact of the Delta variant.

Against the safe-haven Swiss franc, the dollar dropped 0.4% to 0.9189 francs.

Versus another safe-haven, the Japanese yen, the dollar fell 0.4% to 109.615 ye

In other currencies, the Australian dollar fell to a two-week low after Reserve Bank of Australia Governor Philip Lowe painted a very dovish policy outlook with no rate hikes on the horizon until 2024.

The Aussie dollar was last down 0.7% at US$0.7319. In cryptocurrencies, bitcoin was last up 3.1% at $46,400 . Ether changed hands at $3,344, up 1.9%.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Gertrude Chavez-Dreyfuss in New York; Additional reporting by Saikat Chatterjee in London and Shreyashi Sanyal in Bengalaru; Editing by Nick Zieminski and Paul Simao)

 

U.S. Dollar Rises vs Most Currencies as Fed Taper Talk Gathers Pace

The greenback, however, came off its highs in afternoon trading.

The dollar index earlier rose to 92.887, its highest since Aug. 27. It was last up slightly at 92.664.

A round of U.S. economic data is due out this week, starting with consumer prices on Tuesday, which will give the latest update on how hot inflation has been ahead of next week’s Fed meeting.

Philadelphia Fed President Patrick Harker became the latest official to say he wants the central bank to start tapering this year, saying in a Nikkei interview that he was keen to scale back asset purchases.

Tapering talk has boosted the dollar, said Erik Nelson, macro strategist at Wells Fargo Securities in New York.

“We noticed from the Fed communication that they would like to de-link the taper from the rate hike,” Nelson said. “But it will take a lot of convincing and frankly a lot of time for the market to change its reaction function. For now, a taper timeline is closely linked to a rate hike timeline in the market.”

Tapering typically lifts the dollar as it means a step toward tighter monetary policy. It also means the Fed will be buying fewer debt assets, which suggests there will be fewer dollars in circulation.

The Wall Street Journal reported on Friday that Fed officials will seek an agreement to begin paring bond purchases in November.

Aside from inflation, U.S. retail sales and production figures are also scheduled for release this week.

“Another high CPI (consumer price index) reading this week in the face of weakening economic data could begin to paint the Fed into a corner as pressure mounts for stimulus normalization,” said Christopher Vecchio, senior analyst at DailyFX.com, the research unit of forex broker IG.

The euro was among the currencies to lose ground to the dollar, dipping to $1.1770, its lowest in a little over two weeks, after the European Central Bank said last week it would start to trim its own emergency bond purchases. The euro was last down 0.1% at $1.1801.

Against the yen, the dollar was up 0.1% at 110 yen. The dollar also gained 0.5% versus the Swiss franc to 0.9228.

In the cryptocurrency market, bitcoin was down 2.8% at $44,762.

Litecoin, with a market cap of nearly $12 billion and one of the earliest digital currencies in circulation, fell 2.6% to $180.78, according to crypto data tracker CoinGecko, after Walmart Inc said a press release regarding the retailer’s partnership with the cryptocurrency was fake.

Litecoin rose as much as 27.4% on the fake news.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Iain Withers and Saikat Chatterjee in London; Editing by Angus MacSwan, Will Dunham and Dan Grebler)

Dollar Drops With US Yields, Euro Buoyed as ECB Trims Emergency Support

The greenback has largely moved in line with Treasury yields this week. Yields fell on Thursday after the Treasury completed $120 billion in coupon-bearing supply scheduled for this week.

Against a basket of peers, the dollar is holding above a one-month low reached on Friday when jobs data for August showed that jobs growth slowed.

The dollar index dropped 0.23% to 92.47, up from a one-month low of 91.94 on Friday.

Investors are focused on when the Federal Reserve is likely to begin paring bond purchases as it balances rising price pressures against a still relatively soft employment picture.

Chicago Federal Reserve President Charles Evans on Thursday said the U.S. economy is “not out of the woods yet,” and that despite strong economic growth and the promise of vaccines, challenges remain, including supply chain and labor market bottlenecks.

Fed Governor Michelle Bowman, meanwhile, added her voice to the growing number of policymakers who say the weak August jobs report likely won’t throw off the central bank’s plan to trim its $120 billion in monthly bond purchases later this year.

Data on Thursday showed that the number of Americans filing new claims for jobless benefits fell last week to the lowest level in nearly 18 months, offering more evidence that job growth was being hindered by labor shortages rather than cooling demand for workers.

The euro was also supported after the ECB maintained a dovish tone and offered no major surprises as it took a first small step toward unwinding the emergency aid that has propped up the euro zone economy during the pandemic.

In the past two quarters, the bank has purchased around 80 billion euros worth of debt each month. It provided no numerical guidance for the three months ahead, but analysts had predicted before the meeting that purchases would fall to between 60 billion and 70 billion euros in those months.

“The ECB is delivering mainly as expected today,” analysts at TD Securities said in a report. “Looking ahead, the focus will be on how the ECB defines “moderately” – anything less than €60bn/mo could be bearish.”

The euro gained 0.11% on the day to $1.1828.

Bitcoin edged higher it attempted to recover from a large and sudden price drop on Tuesday.

The cryptocurrency gained 1.28% to $46,680.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Karen Brettell; Editing by Philippa Fletcher and Jonathan Oatis)

 

Dollar Pares Gains on Dovish Fed Speak, Before ECB Meeting

New York Fed Bank President John Williams said that more progress is needed in the labor market to achieve the “substantial further progress” for the Fed’s maximum employment goal.

He added, however, that it may be appropriate for the Federal Reserve to start reducing the pace of its asset purchases later this year if the economy continues to improve.

“The Fed is clearly in wait-and-see mode over the next couple of months to see how the economy holds up. Fed’s Williams delivered some dovish comments that support the idea that the soonest the Fed could taper is December,” Edward Moya, senior market analyst at OANDA in New York, said in a report.

Separately, the Fed said in its latest Beige Book that the U.S. economy “downshifted slightly” in August as the renewed surge of the coronavirus hit dining, travel and tourism.

The dollar index, which measures the currency against six rivals, gained 0.14% to 92.66, after earlier rising to 92.86, the highest since August 27.

Benchmark 10-year Treasury note yields fell to 1.33%, after earlier trading at 1.38%. The yields have risen since data on Friday showed that U.S. jobs growth slowed while wage inflation was higher than expected.

An uptick in inflation is complicating the picture for Fed officials who want to see further progress in employment before reducing bond purchases.

“At its very worst, there is some concern that nominal wages are still lagging consumer price increases by cycle extremes … and that nominal wages are struggling to keep up with prices, which is how a wage-price spiral develops,” Alan Ruskin, a macro strategist at Deutsche Bank, said in a report on Tuesday.

Data on Wednesday showed that U.S. job openings rose to almost 11 million in July.

The euro dipped before the European Central Bank meeting set for Thursday. The ECB could tighten policy sooner than many anticipate as inflationary pressures could prove to be persistent, ECB policymaker Robert Holzmann said in a contribution to Eurofi Magazine on Wednesday.

Analysts polled by Reuters see PEPP purchases falling possibly as low as 60 billion euros a month from the current 80 billion, before a further fall early next year and the scheme’s end in March.

The single currency was last down 0.13% on the day at $1.1823.

The greenback also gained against Canada’s loonie on worries that the global economic outlook is deteriorating even as the Bank of Canada looked past a soft patch in the domestic economy.

Sterling dropped after the British government on Tuesday announced a tax hike to fund health spending and social care.

Meanwhile, cryptocurrencies struggled to rebound from hefty losses from Tuesday, when El Salvador became the first country to adopt bitcoin as legal tender and several trading platforms said they experienced performance issues.

Bitcoin dipped 1.22% to $46,283 after sinking as low as $42,900 on Tuesday. Earlier that day it had touched an almost four-month high of $52,956.

For a look at all of today’s economic events, check out our economic calendar.

(Editing by Sandra Maler)

 

Dollar Gains as U.S. Yields Rise Before ECB Meeting

Cryptocurrencies, including Bitcoin, also dropped sharply in volatile trading as several trading platforms said they experienced performance issues.

On Friday, the greenback tumbled to its lowest levels since early August after a surprisingly soft U.S. payrolls report prompted analysts to raise bets the Federal Reserve will not unwind its stimulus plans in coming months.

But the dollar has gained in the past two sessions. The greenback rose 0.33% on Tuesday to 92.42, after touching its lowest since Aug. 4 on Friday.

“It does appear that after the sell-off the dollar has maybe established a short-term base at least,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.

“The Federal Reserve we think is still likely to move toward tapering by the end of this year, the U.S. economy is likely to perform relatively strongly, so our view is minor dollar dips, minor dollar weakness is probably a buying opportunity,” he said.

Data on Friday showed speculators’ net long bets on the U.S. currency grew in the latest week, with the value of the net long dollar position at $10.98 billion for the week ended Aug. 31, the largest long position since March 2020.

The dollar also benefited from rising U.S. Treasury yields with the U.S. government selling new debt this week, including $58 billion in three-year notes, $38 billion in 10-year notes and $24 billion in 30-year bonds. [US/]

The yield increase “has helped the dollar index to recoup its post-NFP (non-farm payrolls) losses and then some,” Brown Brothers Harriman strategists said in a note.

U.S. 10-year yields, which were around 1.299% before Friday’s data release, stand now at 1.373%.

The euro was last at $1.1844, below Friday’s one-month peak of $1.1909.

The ECB is seen debating a cut in stimulus at its meeting on Thursday, with analysts expecting purchases under the ECB’s Pandemic Emergency Purchase Programme (PEPP) falling possibly as low as 60 billion euros a month from the current 80 billion.

The Australian dollar weakened after the Reserve Bank of Australia stuck with plans to taper its bond buying but said it would extend the timeline as the economy struggles with coronavirus lockdowns.

The pound also dropped after the British government set out a plan to raise taxes.

Cryptocurrencies plunged sharply on Tuesday with bitcoin dropping as much as 19% on the day and ether falling 23%, before paring losses.

Several crypto trading platforms said they experienced performance issues on Tuesday, though it was not clear if these were a contributor to, or a result of, the volatility.

The drop also came as El Salvador on Tuesday became the first country to adopt bitcoin as legal tender.

Bitcoin was last down 10% on the day at $47,153 and ether was down 12% at $3,460.

For a look at all of today’s economic events, check out our economic calendar.

(Additional reporting by Saikat Chatterjee in London, editing by Mark Heinrich and David Gregorio)

Dollar Shakes Off Jobs Report Blues in Big Central Bank Week

The dollar index, which measures the currency against six rivals, edged 0.1% higher to 92.23, after dipping to 91.941 for the first time since Aug. 4 on Friday, when a closely watched U.S. labour report showed the world’s largest economy created the fewest jobs in seven months in August.

But the weak jobs report did not spark a new wave of dollar selling on Monday as the greenback spent the Asian session pushing higher against its rivals, prompting some major currencies including the euro and the Australian dollar to move back to pre-Friday jobs report levels.

Benchmark 10-year U.S. Treasury yields firming to more than one-week highs also boosted the dollar. U.S. markets are shut for a holiday, contributing to lower volumes.

While analysts remain bearish on the outlook for the greenback with Citibank strategists expecting it to weaken in the coming months as the Fed postpones tapering plans to November, hedge funds have quietly ramped up bullish bets.

Latest data showed they have increased bets on the greenback versus the euro for a second consecutive week, boosting net bets to their highest since March 2020.

Most of the dollar’s gains was focused on the Australian dollar which weakened 0.17% to $0.7435 ahead of a central bank decision on Tuesday where analysts remain divided on whether the Reserve Bank of Australia will call time on its stimulus plans.

National Australia Bank predicts the central bank will reduce asset purchases again, “although the optics of tapering amid protracted lockdowns means it is likely to be a close decision,” NAB analyst Tapas Strickland wrote in a report.

The euro also failed to extend its gains on Monday after rising above the $1.19 levels for the first time since the end of July. It was trading 0.1% weaker at $1.1873 before an European Central Bank policy decision on Thursday.

Economists reckon it is still too early for the ECB to call time on emergency stimulus, but it could agree to slow the pace of its bond buys after euro area inflation surged to a 10-year high at 3% last week.

In cryptocurrencies, bitcoin was about flat at $51,785.60, after earlier touching $51,920, a level not seen since May 12. Smaller rival ether traded little changed at $3,942.77 after topping $4,000 last week for the first time since mid-May.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Saikat Chatterjee; Editing by Alexander Smith)

Introduction to the Major Fundamental Influences on Forex Prices

When most individuals think of trading, they think of stocks and futures. This is probably because of the long-term history of these investment vehicles. Some may even think of cryptocurrencies because of their huge popularity with a younger generation of investors.

What they may not realize, however, that in terms of market value, there is one asset class that dwarfs them all and, in fact, some may not have even realized that they’ve already speculated in it when they’ve traveled internationally or bought something from a foreign country.

This huge investment class is the foreign exchange market, also known as FOREX. In the FOREX market, an estimated $6 trillion is traded on a daily basis. To put this in perspective, the U.S. stock market trades around $257 billion a day; quite a large sum, but only a fraction of what FOREX trades.

For a novice trader, there is a lot to learn about trading in the foreign exchange market because it lacks the familiarity of stocks like Apple, IBM and Google, as well as the glamor of gold and silver futures.

Before even attempting to trade or invest in the FOREX market, individuals have to become aware of the macro-economic and geo-political factors that help drive the price action in this trading vehicle.

Table of contents

What is FOREX?

Simply stated, the word FOREX is derived by combining parts of foreign currency and exchange. It is also referred to as FX trading.

Foreign exchange is the process of changing one currency into another for a variety of reasons, usually for commerce, trading, finance or tourism. FOREX markets tend to be the largest and most liquid asset markets in the world.

Briefly, Forex markets exist as spot (cash) markets as well as derivatives markets, offering forwards, futures, options, and currency swaps.

Market participants use Forex to hedge against international currency and interest rate risk, to speculate on geopolitical events, and to diversify portfolios, among other reasons.

What is a FOREX Pair?

In foreign exchange, currencies trade against each other as exchange rate pairs. For example, EUR/USD is a currency pair for trading the Euro against the U.S. Dollar.

A FOREX pair or currency pair is simply the quotation of the value of a given currency against another. The first is termed the base currency and is the currency being sold, while the second is known as the quote currency and is the currency being bought.

For example, the quotation EUR/USD = 1.0700 would mean 1 Euro is exchanged for $US1.07.

What are the Factors Affecting Forex Pairs?

If you desire to become a successful FOREX trader then you have to develop an understanding of the fundamentals that drive the price action. This is the information that will help you to establish an informed hypothesis about whether a particular FOREX pair is being fairly valued at present and what potential upsides or downsides might be from current price levels.

These include: central bank policy, interest rates, inflation, economic growth, trade data, and political/government factors.

How Does Central Bank Policy Influence FOREX Prices?

The major central banks influence Forex prices by controlling open market operations and interest rate policies. They are responsible for fixing the price of its domestic currency on Forex.

Any action taken by a central bank in the FOREX market is done to stabilize or increase the competitiveness of that country’s economy. A central bank may weaken its own currency by creating additional supply during periods of long deflationary trends, which is then used to purchase foreign currency. This effectively weakens the domestic currency, making exports more competitive in the global market.

Central banks use these strategies to calm inflation. Their doing so also serves as a long-term indicator for FOREX traders.

How Do Interest Rates Influence FOREX Prices?

Interest rates have a significant influence on currency movements. So much so that a currency pair will often spike up or down following a central bank announcement.

The main reason for the volatility is the so-called carry trade, where investors borrow at lower interest rates in one currency and invest at higher interest rates in another.

Basically, investors tend to chase yields so when a central bank raises rates, it tends to make that country’s currency a more attractive investment.

How Does Inflation Influence FOREX Prices?

Central banks raise and lower interest rates to control inflation. Therefore, movement in the inflation rate can impact currency prices. For example, if a country’s central bank believes inflation is rising too quickly, it may raise interest rates to lift the cost of borrowing and to take money out of the system. This action is designed to slow the economy.

For this reason, the national consumer price index (CPI) is one of the most closely watched pieces of information for FOREX traders.

How Does Economic Growth Influence FOREX Prices?

Economic growth is tied directly to the inflation rate, which relates to interest rates. When a country’s economy is growing quickly as measured by the Gross Domestic Product (GDP), for example, the rate of inflation will typically start to rise. This usually means the central bank will need to lift interest rates to slow the rate of growth.

This is why the currency of a country showing strong economic growth will often appreciate against those of other countries showing slow or negative growth.

How Does Trade Data Influence FOREX Prices?

Balance of Trade data, which is based on the relationship between a country’s imports and exports, also has an impact on the direction of a currency’s prices. Trade figures can also be seen by some as a sign of the strength of the economy, which in turn has implications for inflation and interest rates, and therefore the domestic currency.

If a country is exporting more goods than it imports, for example, it increases demand for its currency as the money used to pay for those exports ultimately needs to be converted into the domestic currency.

How Does Political/Government Factors Influence FOREX Prices?

Government policy can have profound implications on FOREX prices especially if it influences the inflation rate.

A government could decide to trim spending and pay down debt, which may end up causing the economy to slow.

Following the pandemic of 2020, many governments flooded their economies with fiscal stimulus. As this money trickled through the economy, it caused inflation which is fueling a response from central banks in the form of interest rate hikes.

In response, Forex markets have experienced heightened volatility as the major central banks race to stem runaway inflation by raising rates. Investors will become more attracted to the currency of the country that raises interest rates more aggressively.

Other Factors to Consider When Trading FOREX

Although fundamental data and daily news events play a major role in the price action of a currency, it is important to note that an estimated 90% of the daily FOREX volume is fueled by speculators (traders). So in addition to knowing the major fundamental influences on the long-term direction of currencies, traders will also need to learn about the technical factors that play a major role in the movement of currency prices.

Dollar Softens for Fourth Straight Day After U.S. Payrolls Miss

Nonfarm payrolls increased by 235,000 in August, well short of the 728,000 forecast by economists in a Reuters poll, while the unemployment rate dipped to 5.2% from 5.4% in the prior month.

The dollar index dropped to a low of 91.941, its lowest level since Aug. 4, and was last down 0.231% at 92.014. The index is down about 0.7% on the week.

The dollar has been subdued on uncertainty over the path of Fed policy. Fed Chair Jerome Powell said last Friday that while tapering of its stimulus could begin this year if job growth continues, the central bank was in no hurry to do so.

Rising COVID-19 cases in recent weeks have brought on concerns the economic recovery could stall. The jobs data will likely keep the Fed on hold.

“It adds more concern or focus on the October number, because now we want to see if there is a trend,” said JB Mackenzie, managing director for futures and forex at TD Ameritrade in Chicago.

“(The Fed) is trying to telegraph that if the economy continues to heat up and they need to take action, they will, and that transparency is important to the markets and that is one of the main reasons you continue to see not a huge reaction to the downside here because the market feels as though they have been given that clear direction.”

Mackenzie said the 92 level was an important support level for the greenback after having bounced back from that level in early August.

Separately, data from the Institute for Supply Management showed activity in the services sector grew at a moderate pace in August, with signs that rising prices and supply constraints were beginning to ease.

The euro strengthened against the greenback following the report, touching a high of 1.1909 to match its best level since July 30.

The single currency has been supported by data earlier this week that showed regional inflation at a decade high and hawkish comments from European Central Bank officials ahead of a policy meeting on Sept. 9.

The euro was last up 0.15% to $1.1891.

The Japanese yen strengthened 0.29% versus the greenback to 109.62 per dollar, gaining ground after the jobs data, but showed little reaction to Prime Minister Yoshihide Suga’s decision to step down at the end of the month.

In cryptocurrencies, Bitcoin last rose 2.2% to $50,358.39 while ethereum last rose 4.48% to $3,956.04 after rising as high as $4,025 to top the $4,000 mark for the first time since May 15.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Chuck Mikolajczak; Editing by Emelia Sithole-Matarise and Steve Orlofsky)

Dollar Softens After ADP; Euro Hits One-Month High

The greenback fell after the ADP National Employment Report showed private payrolls rose by 374,000 in August, up from 326,000 in July but well short of the 613,000 forecast. A report on weekly initial jobless claims arrives on Thursday and on Friday the government releases the payrolls report for August, which could provide clues about the Federal Reserve’s policy path.

“Certainly the recovery has been uneven but if nonfarm payrolls should also disappoint, that would seemingly close the door to an imminent taper and keep the dollar in a bit of a funk,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington DC.

The dollar has been under pressure since Friday, when Fed Chair Jerome Powell said at the Jackson Hole conference that while tapering could begin this year, the central bank was in no hurry to raise interest rates.

Concerns about rising COVID-19 cases denting the economic rebound could also serve to keep the central bank from scaling back stimulus.

Other data showed U.S. manufacturing activity increased more than anticipated in August, but a measure of employment in factories fell to a nine-month low, likely due to a shortage of workers.

The dollar index fell 0.203% and hit a new one-month low of 92.376.

The euro rose against the greenback to a one-month high as inflation worries persisted following data on Tuesday which showed euro zone inflation increased to 3% year-on-year in August, the highest in a decade and above the European Central Bank’s 2% target, as well as the 2.7% Reuters forecast.

The euro was up 0.3% to $1.1843, after rising to as much as 1.1857, its highest level since Aug. 5.

“We have seen numbers that argue against keeping policy so low for so long and that has been helping the euro… it is certainly going to heighten the focus on the QE debates next week when we hear from the ECB,” said Manimbo.

German Bundesbank President Jens Weidmann said euro zone inflation risks overshooting ECB projections and the central bank should prepare for the end of its 1.85 trillion euro Pandemic Emergency Purchase Program (PEPP).

The ECB is scheduled to hold a policy meeting on Sept. 9.

The Japanese yen strengthened 0.04% versus the greenback at 109.97 per dollar, while sterling was last trading at $1.3773, up 0.14% on the day.

In cryptocurrencies, Bitcoin last rose 2.9% to $48,521.68 while Ethereum last rose 8.18% to $3,713.24. Ether rose as high as $3,791.28 on the day, its highest level since May 16.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Chuck Mikolajczak; Editing by Mark Heinrich and David Gregorio)

 

Dollar Falls to More than 3-Week Low With Payrolls in Focus

The greenback has struggled since Federal Reserve Chair Jerome Powell’s said at the Jackson Hole conference on Friday that tapering could begin this year, but the central bank was in no hurry to raise interest rates.

“If the payrolls number disappoints, then eurodollar has another excuse to trade higher again because that is going to bring out all the doves again saying the Fed is not going to taper in September,” said Erik Bregar, director and head of FX strategy at the Exchange Bank of Canada in Toronto.

The dollar briefly pared some of its decline on the session after the S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas showed U.S. single-family home prices rose in June from the prior year at the fastest pace on record.

Choppiness for the greenback ensued as a weaker-than-expected Chicago PMI for August saw the dollar trim its decline, only to once again resume a downward move after the Conference Board’s reading for consumer confidence fell short of expectations, weighed down by rising COVID-19 cases and higher inflation.

Investors will look to a round of U.S. data later this week to gauge the strength of the labor market, culminating with payrolls numbers due Friday, in an effort to determine when the Fed may begin tightening its policy.

“All these releases are having minor influences, but if you are looking for a big move, maybe wait until Friday,” said Bregar.

Analysts said trade on Tuesday may also be influenced by month-end stock portfolio rebalancing, which could lead to flows into the Canadian dollar, sterling and the Swiss franc and out of the greenback.

The dollar index fell 0.065%, with the euro up 0.12% to $1.1809.

The dollar hit a low of 92.395 on the day, its lowest level since Aug. 6 but is still up more than 0.6% for the month.

Data earlier in the day showed euro zone inflation surged to a 10-year-high this month, with consumer prices in the 19 countries sharing the euro up by 3%.

Sterling strengthened to a two-week high of $1.3807, and was last trading at $1.3753, down 0.04% on the day.

The Japanese yen weakened 0.04% versus the greenback at 109.96 per dollar.

In crytocurrencies, bitcoin last rose 0.49% to $47,235.84 while ethereum last rose 4.95% to $3,386.14. Ether rose to as much as $3,475, its highest level since May 18. The cryptocurrency is up more than 30% for August, on pace for its biggest monthly percentage gain since April.

(Reporting by Chuck Mikolajczak; Editing by Alexander Smith)