Most forex currencies held still last week as minutes from the Fed meeting at the start of the month became public knowledge. The minutes revealed that many officials of the institution were supporting the idea of lowering the rate increases going forward.
The officials feel that after four consecutive 75-basis point increases, they have managed to subdue the rampant inflation. And now they can move on with a 50-basis point rate rise next month and another 25 basis points at the first meeting of next year. However, some analysts believe the Fed will still feel the need to do more if inflation persists.
The news caused major forex currencies to stagnate or even fall. For example, the dollar index, which measures the greenback against six major peers, was down 0.2% at 105.75 after dropping by over 1% last Wednesday. That meant the index had dropped by over 5% this month, and it’s on track to have its worst monthly performance in over 12 years.
Despite the Fed taking interest rates to heights not witnessed since 2008, slightly cooler-than-expected U.S. consumer price data had ruled out the possibility for a moderate pace of hikes. The effect of the high rates has been felt on money markets that are battling the bear market. On the other hand, forex traders have had to put their forex money management skills to the test since there isn’t much money to throw around.
Niels Christensen, chief analyst at Nordea, notes that “there are not many dollar buyers around these days after the correction higher in the euro-dollar in the first half of November.”
The Euro Managed To Record Gains
On the other hand, the euro at least managed to hold onto some gains. This is despite the European Central Bank’s October meeting, where policymakers expressed fears that inflation was getting worse. And thus, they planned further rate hikes.
That said, the euro was up 0.2% at $1.0415.
Additionally, the sterling pound was up 0.7%, trading at $1.2135 on the day. The pound managed to rally 1.4% last Wednesday following a positive report on the British economy that beat expectations. However, the report predicts a contraction is on the way.
Moving on to other currencies, the euro weakened 0.4% against the Swedish krone. The decline came after Sweden’s Riksbank raised rates by 75 basis points, as was expected. It is rumored that the institution still plans to make additional hikes to combat rampant inflation.
As for the Yuan, it remained firm following news that the Chinese cabinet planned to enforce timely cuts in the bank’s reserve requirement ratio (RRR), alongside other monetary policy tools. And by doing this, they hope to keep liquidity reasonably ample.
As the Yuan remained steady, things were not so rosy for the Hong Kong dollar. Bill Ackman, a billionaire investor, believes the HKD will fall and its peg to the US dollar will be broken. The forecast comes as the currency has struggled in recent months. Since May, the HKD has been pinned near the weaker end of its band. Things could change, as it has risen in recent weeks as markets begin to price in a peak in US interest rates. It currently trades at 7.82 per dollar.
COVID Restrictions Impact Yuan
Coming back to this week, the Swiss franc and Japanese yen, both seen as safe havens, managed to record some gains on Monday. On the other hand, the Australian dollar and Chinese yuan underperformed following growing unrest over COVID restrictions in China.
Last Sunday night, hundreds of demonstrators clashed with police in Shanghai for a third day. The protest has spilled over to other cities after a deadly fire broke out in the nation’s far west, but response has been muted due to government-imposed restrictions.
Chris Weston, head of research at Pepperstone, says that they “are looking at the government response to see what is happening.” He goes on to add “that the government response is so unpredictable, and of course that means de-risking.”
Nonetheless, the US dollar has fallen 0.46% to 138.51 Japanese yen and 0.41% to 0.944 Swiss franc.
