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- The US dollar index bounced back after falling to its lowest point in 12 months.
- The Brazilian real has retreated in the past few months as key commodities fell.
- The Libyan dinar rose to its highest level this year as the central bank governor fled the country.
- The Canadian dollar will be in the spotlight as the central bank delivers its decision.
- The British pound has pulled back in the past few days because of the dollar strength.
US dollar index bounces back
The US dollar index (DXY) dropped to $100.12, its lowest point in over 12 months and then bounced back to $101.30. It remains much lower than the year-to-date high of $106.18.
The dollar has come under pressure in the past few months after the Federal Reserve hinted that it would start cutting interest rates in its September meeting.
These hopes rose last week after the Bureau of Labor Statistics (BLS) revised the official jobs numbers released in the 12 months to March. In its report, the agency noted that the economy created 818,000 fewer jobs than expected.
The US dollar will be in the spotlight this week as ADP publishes its estimates for private payroll numbers on Wednesday. The BLS will also release the official jobs data, which will set the tone for its meeting later this month.
In most cases, the US dollar index drops when the Federal Reserve cuts interest rates because of falling yields and potential outflows from the United States.
The US dollar also rose after the encouraging US Personal Consumption Expenditure (PCE), spending and income numbers. In a note, a Bloomberg analyst said:
July’s spending, income and inflation data were consistent with or modestly better than expectations and may revive talk of a ‘Goldilocks’ economy. But we think details of the report show activity is cooling, with a more notable slowdown in income and spending likely in the second half of the year.Bloomberg
Brazilian real weakness
The Brazilian real has retreated against the US dollar in the past few weeks as its key commodities fell. The USD/BRL exchange rate rose to 5.6, its highest level in weeks.
Commodities like corn, soybeans, and sugar have all dropped by over 50% from the highest point in 2023 and the trend is continuing. This decline is notable because Brazil is one of the biggest exporters in the world.
Brazil is also a major oil and iron ore exporter. Brent has dropped to $76.9 while the West Texas Intermediate (WTI) fell to 73.6. Iron ore, a major component in the steel industry has also fallen by over 30% from the highest point this year.
Therefore, this decline means that Brazil is making less money from its exports.
The currency also declined after the president appointed Gabriel Galipolo as the next central bank governor.
Libyan dinar rally continues
The Libyan dinar continued rising, reaching its highest point since July 2023. The USD/LYD exchange rate dropped to 4.7, down by over 2.50% from its highest level this year.
This price action happened in a week that the Libyan central bank governor and his team fled the country after coming under intense pressure. According to the FT, he was forced out for questioning Tripolis’s government spending.
The crisis led to rising risks of violence in the country and low oil exports. Libya, unlike most countries, generates most of its capital from oil exports. Therefore, a drop in exports will likely lead to foreign exchange.
The Libyan dinar, which is pegged to a basket of currencies, has dropped by over 300% since Gadaffi was killed in 2011. Most of this decline happened after the central bank devalued the currency in 2021.
Canadian dollar waits for the BoC decision
The Canadian dollar will be the top currency to watch this week as the country’s central bank delivers its interest rate decision on Wednesday.
The USD/CAD exchange rate has retreated by over 3.8% from its highest point this year and was trading at 1.3493 on Friday.
Economists expect the bank will deliver another interest rate cut in this meeting since there are signs that the economy was easing. Those polled by Reuters also see the bank cutting rates two more times this year.
Financial results by companies like Bank of Nova Scotia and Bank of Montreal showed that the country's non-performing loans (NPL) were increasing. Therefore, with inflation falling, the bank is under pressure to slash rates more.
British pound retreats
The British pound retreated for four consecutive days as the US dollar bounced back. The GBP/USD pair fell to 1.3125, down from the year-to-date high of 1.3265. Still, the pair has jumped by almost 10% from its lowest point in 2023.
Sterling has done well this year because of the surprisingly good performance of the British economy. Inflation has dropped to the Bank of England’s target of 2.0% while the unemployment rate has fallen to 4%.
Recent economic numbers have shown that the manufacturing and services PMIs remained above 50 in August. This is a sign that the economy was doing better than expected.
However, there are risks that the economy could decelerate if the new Labour government starts hiking taxes to fill the £22 billion hole in the budget.
South African rand rally continues
The South African rand has done well in the past few months, making it the best-performing currency in the emerging markets. The USD/ZAR exchange rate dropped to 17.8, down by over 8% from its highest point this year.
This performance happened because of the ongoing stability in the country after the last general election and the coalition government between the ANC and the Democratic Alliance party.
The coalition government has brought in stability in the country, boosting consumer and business confidence. Inflation has also started falling while the central bank is expected to start cutting rates later this year.
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