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Dollar Exhibits Mixed Performance Against Major Currencies; Pound Weakens, Yen Experiences Brief Surge

Bruno T
Latest News
October 17 2023 4:33AM

The U.S. dollar remained within a narrow trading range on Tuesday as traders monitored developments in the Middle East and prepared for speeches by central bank officials later in the week. In contrast, the pound saw a decline in value following data indicating a weakening labor market.

The yen experienced a brief surge but quickly gave up its gains after a media report suggested that the Bank of Japan was contemplating an increase in its core CPI forecast for the fiscal years 2023 and 2024 while maintaining the inflation outlook for 2025. The yen was last trading at 149.47 per dollar, having reached as high as 148.75 after the report. Analysts noted that the initial reaction to higher near-term inflation forecasts was offset by longer-term projections, with central banks not necessarily aiming to achieve short-term CPI targets.

Investors were also vigilant for signs of intervention by Japanese authorities as the yen approached the 150 level, which prompted officials to buy the currency in 2022. Japan’s top financial diplomat, Masato Kanda, emphasized that the yen was still considered a safe haven asset like the dollar and the Swiss franc, benefiting from demand due to the Middle East conflict.

Valentin Marinov, Global Head of G10 FX Research and Strategy at Credit Agricole CIB, noted that broader currency market drivers continued to be tensions in the Middle East and elevated global bond yields. The primary question for the markets was the potential for further escalation in these factors.

The dollar index (CCOM:DXY), measuring the U.S. currency against six peers, edged down 0.1% to 106.13, following a 0.4% decline on Monday.

Market attention was focused on Federal Reserve Chair Jerome Powell, who was scheduled to speak on Thursday, along with a series of speeches by regional bank leaders in a busy week leading up to the Federal Reserve’s meeting at the end of October.

Federal Reserve Bank of Philadelphia President Patrick Harker expressed the view on Monday that the central bank should avoid increasing the cost of borrowing to prevent additional economic pressure.

Fed funds futures traders were pricing in a roughly 7% probability of a rate hike at the November meeting, with a 35% chance of a hike by December, according to CME’s FedWatch tool.

The pound (FX:USDGBP) declined following a slowdown in the growth of regular pay for British workers and a drop in job vacancies, signaling a cooling labor market. However, some labor market data, including the unemployment rate, was delayed until the following week. Sterling was last trading at $1.2174, down 0.4% for the day.

The New Zealand dollar fell by 0.6% to $0.5898 after consumer inflation data showed a two-year low, reducing expectations of a further cash rate hike by the central bank in November.

Meanwhile, the euro gained 0.1% to $1.0569 as German investor sentiment improved more than expected in October, according to the ZEW economic research institute.

The Australian dollar rose by 0.2% to $0.6357. Minutes from the Reserve Bank of Australia’s October 3 policy meeting revealed that the central bank had considered a rate hike but ultimately decided against it, citing insufficient new information to warrant a move.