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- The US dollar index slipped to its December lows after Jerome Powell pointed to Fed rate cuts.
- The British pound soared to 2022 highs after the US published strong manufacturing and services PMI numbers.
- The Japanese yen rose against the US dollar after the BoJ governor warned that more hikes were coming.
- The Turkish lira and Indian rupee have dropped to their lowest levels on record.
US dollar plunges after dovish Fed
The US dollar index continued its strong sell-off after the Federal Reserve chair hinted that the bank would start cutting interest rates soon. In a statement at the Jackson Hole Symposium in Wyoming, he expressed concerns that the economy was losing momentum and that a rate cut would be warranted in the next meeting.
His statement came two days after the Fed published minutes of the last meeting, in which some officials supported cutting rates in the July meeting.
It also came a day after S&P Global published weak flash manufacturing PMI numbers, signalling that the economy was weakening. The PMI figure came in at 44.5, its lowest level in months.
Worse, the Fed has been relying on faulty jobs numbers to make its interest rate decisions. In a report last week, the Bureau of Labor Statistics (BLS) said that the economy created 818k fewer jobs in the 12 months to March, the worst revision since 2009.
The US dollar mostly weakens when the Fed is cutting interest rates. For example, it dropped to $89 in 2021 as the Fed flooded the economy with cash by cutting rates and implementing quantitative easing policy.
Analysts now expect the next NFP data to determine the size of the rate cut. If the jobs numbers are weak, then the Fed may decide to cut by 50 basis points. Analysts at ING Bank said:
If we get a sub 100k on payrolls and the unemployment rate ticking up to 4.4% or even 4.5% then 50bp looks more likely.
If payrolls comes in around the 150k mark and the unemployment rate stays at 4.3% or dips to 4.2% we can safely say it will be a 25bp.ING Analysts
Sterling surge accelerates
The British pound continued rising against the US dollar and other major currencies. The GBP/USD pair soared to a high of 1.3217, its highest level since March 2022 while the GBP/EUR soared to 1.1800 while the GBP/AUD jumped to 1.9500.
The rally happened after the UK published strong economic numbers last week, meaning that the economy was doing well.
According to S&P Global, the composite PMI, which looks at the state of the manufacturing and services sectors, rose to 53.4 in August, the highest point since 2022. It was the higher than the previous reading of 52.8 in July.
Additional data showed that the country’s labor market is tight while inflation was falling and currently stands at 2.0%. Therefore, sterling rose because analysts expect that the Bank of England may decide to slow the pace of its interest rate cuts.
Japanese yen regains momentum
The USD/JPY pair continued its slide as investors focused on the hawkish statement by Kazuo Ueda, the Bank of Japan (BoJ) governor. Speaking to Japan’s parliament last week, Ueda noted that the bank may consider delivering another rate hike in the next meeting if inflation remains steady.
Therefore, the Japanese yen rose as investors continued to unwind the Japanese yen carry trade that has existed for decades. This carry trade happened as investors borrowed the cheap Japanese yen to invest in the international market, especially in the high-yielding market.
Therefore, with the Fed considering cutting rates, it means that the spread between US and Japan’s rates will narrow, making the carry trade obsolete.
Technicals suggest that the USD/JPY may continue falling to the next point at 140.26.
Turkish lira and Indian rupee slips to record low
Meanwhile, some notable currencies have slipped to their record lows.
The USD/INR soared to 84.5, meaning that it has deteriorated by almost 18% in the last five years. This price action happened even as the US dollar crashed and as the Indian economy continued firing on all cylinders. Analysts expect that the country’s annual growth rate will be over 7% this year.
The Indian rupee has also plunged even as the Reserve Bank of India (RBI) has maintained a hawkish tone. It is expected to cut rates in 2025. Therefore, there is a likelihood that the rupee is undervalued, meaning that it may stage a comeback soon
The Turkish lira’s sell-off continued last week, pushing the USD/TRY to a record high of 34. It has fallen by over 16% this year.
Last week, the central bank decided to leave interest rates unchanged for the fifth consecutive month. It has pushed them from 8.5% in May last year to 50% in a bid to fight the soaring inflation.
Therefore, while the bank has returned to orthodox monetary policy, the market believes that President Erdogan may lose his patience with the governor and replace him. Erdogan has always been opposed to high interest rates and has a long history of replacing central bank officials who hike rates. ING analysts said:
Given that the relatively stable currency and normalization in domestic demand should support a decline in the underlying inflation trend over the remainder of this year, we see room to cut in November or December, depending on the data.ING Analysts
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