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How is the US Dollar Performing in Light of Changing Rate Cut Expectations?

April 19, 2024

Looking at today, April 19 2024, the U.S. dollar is on track to achieve a second consecutive week of gains as of this Friday, driven by an unexpectedly robust U.S. economy which has recalibrated both investor and policy expectations concerning Federal Reserve rate cuts for the remainder of the year. The greenback reported a 0.17% rise over the week, even as its upward momentum experienced a minor pause since Thursday. This slight stall follows a unique trilateral warning issued by financial leaders from the U.S., Japan, and South Korea, targeting potential joint intervention due to the depreciation of the Japanese and South Korean currencies.

Currently, the strength of the dollar has put considerable pressure on Asian currencies. Carol Kong, a currency strategist from the Commonwealth Bank of Australia, notes that the likelihood of a joint Asian foreign exchange intervention has increased, though U.S. involvement remains uncertain. The intervention would primarily counteract the negative effects on local economies while inadvertently supporting the U.S. Federal Open Market Committee’s efforts to combat inflation.

Japanese Yen Stable

The Japanese yen has remained relatively stable at 154.61 against the dollar, hovering near a 34-year low. The currency is down 0.8% this week and 2% for the month, signaling potential further interventions if it reaches or surpasses the critical level of 155. In response to the yen’s depreciation, Bank of Japan Governor Kazuo Ueda indicated the possibility of an interest rate increase to manage inflation risks, underscoring the interconnectedness of currency values and monetary policies.

In Europe, the sterling and euro have both seen modest declines against the dollar this week, with expectations set for the European Central Bank to initiate rate cuts by June. This anticipated policy divergence from the Federal Reserve, which has delayed its expected rate cuts until later this year, could further weaken the euro against the dollar. Fed funds futures currently anticipate roughly 40 basis points of U.S. rate cuts in 2023, a substantial reduction from the 160 basis points anticipated at the year’s start.

US Economy Remains Strong.. For Now

The ongoing strength of the U.S. economy, coupled with persistent inflation, has prompted Federal Reserve officials, including Chair Jerome Powell, to suggest a more prolonged period of restrictive monetary policy. Economists from Wells Fargo believe that while rate cuts may be delayed, they are still likely before year-end, anticipating a gradual reduction in inflation.

Amid these developments, the Australian and New Zealand dollars also experienced declines this week, influenced by domestic factors such as employment figures and the broader global economic context. The Australian dollar saw a weekly decline of over 0.8%, and the New Zealand dollar is set to lose 0.7% for the week.

Historically, shifts in U.S. rate expectations have had profound implications on global currency markets. For instance, during the 2000 dot-com bubble burst and the 2008 financial crisis, rapid adjustments in U.S. monetary policy significantly impacted currency valuations worldwide, demonstrating the global ripple effects of U.S. economic indicators and Federal Reserve decisions. The current economic climate suggests similar patterns may unfold, influencing not only domestic policies but also international financial stability.

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