July 22 2024: The dollar eased slightly against a basket of currencies on Monday while dropping sharply versus the yen as investors focused on U.S. President Joe Biden’s decision to end his re-election campaign and the next moves from the Federal Reserve and the Bank of Japan.
Analysts noted that the Japanese currency could be at a turning point after a prolonged decline since the beginning of 2024. The Fed is nearing a rate cut, and the BoJ is widely expected to tighten its monetary policy soon.
The Federal Reserve Open Market Committee will meet on July 30, followed by the Bank of Japan the next day. Money markets are fully pricing in a 25 bps Fed rate cut by September.
“The yen has become more volatile ahead of the latest policy meetings from the Fed and BoJ,” said Lee Hardman, senior currency analyst at MUFG, highlighting the Japanese currency’s support from “more compelling evidence of slowing U.S. inflation.”
“Furthermore, former President (Donald) Trump has expressed concern over the high level of the U.S. dollar versus the yen,” he added.
The greenback dropped 0.6% against the Japanese currency, settling at 156.58 yen.
The dollar index, which measures the value of the U.S. dollar relative to a basket of foreign currencies, fell 0.1% to 104.30.
Biden announced his exit from the race on Sunday, endorsing Vice President Kamala Harris as the Democratic candidate for the November election. Harris quickly gained backing from many within the party, although several high-profile names, including former House of Representatives Speaker Nancy Pelosi, remained silent. Former President Trump, the Republican nominee, is well ahead in betting markets following Biden’s recent debate performance and ongoing questions about his age and health.
Commonwealth Bank of Australia strategist Joseph Capurso cautioned against reading too much into the dollar’s reaction. “The bottom line is what the polls show this week,” Capurso said, explaining that a decline in odds for a Trump win should see the dollar weaken, and vice versa.
“Harris might be a stronger candidate, but is it enough to turn the polls?” Capurso questioned.
Unicredit noted that the odds associated with various outcomes in the U.S. election have changed little since Biden’s announcement.
The euro was up 0.05% at $1.088. Analysts pointed out that the ECB did not strongly oppose the heavy pricing for a rate cut in September during last week’s policy meeting, which remains a strong base case.
The dollar strengthened 0.1% to 7.2943 yuan in offshore trading after the People’s Bank of China unexpectedly cut the seven-day reverse repo rate to 1.7% from 1.8%, aiming to improve open market operations and support the real economy. This move was followed by surprise reductions in the one- and five-year loan prime rates.
The Australian dollar sagged 0.25% to $0.6651, giving up earlier gains of about the same margin following Biden’s withdrawal announcement. The New Zealand dollar fell 0.22% to $0.5996.
“Sentiment is fragile and AUD/USD has clearly taken notice … with China’s rate cuts adding fuel to the bearish fire,” said Matt Simpson, a market analyst at City Index.
