Aug 1 2024: On Thursday, the dollar rebounded after a decline the previous day, driven by ongoing central bank actions impacting currency markets. Meanwhile, sterling hit a three-week low ahead of a critical Bank of England decision.
The dollar index, which tracks the currency against six major counterparts, rose 0.29% to 104.35. This followed a 0.4% drop the previous day after the Federal Reserve kept interest rates unchanged but hinted at potential rate cuts in September.
Chris Turner, head of global markets at ING, noted that geopolitical tensions and a slowing global economy were likely bolstering the dollar, a traditional “safe haven” for investors during stressful times, despite the Fed’s inclination towards rate cuts.
“The geopolitical and macro environment elsewhere isn’t particularly strong,” he said. “We still face significant tensions in the Middle East, and the manufacturing sector seems to be in recession across large parts of Europe and Asia.”
The assassination of Hamas leader Ismail Haniyeh in Tehran on Wednesday heightened fears of a broader Middle East conflict, which supported the dollar’s strength.
The euro fell to a three-week low at $1.0782, down 0.36% as the dollar gained momentum.
Investor positioning ahead of a possible BoE rate cut later in the day was weighing on the pound and other currencies, providing further support for the dollar, according to Lee Hardman, currency strategist at MUFG.
Japan’s yen remained relatively stable, with the dollar trading at 149.87 yen. The yen surged about 1.8% the previous day following the BOJ’s second rate hike this year. It had a strong performance in July, rallying 7.3%, its best monthly performance since November 2022, after starting the month near 38-year lows.
Japanese authorities’ intervention to strengthen the yen initiated the rally, combined with a narrowing U.S.-Japan interest rate gap, which led to the unwinding of profitable carry trades, where traders borrow yen at low rates to invest in higher-yielding dollar assets.
Sterling Slides Against the Dollar
The pound fell 0.57% to a three-week low of $1.2779 ahead of a closely watched interest rate decision by the Bank of England at 1100 GMT.
Traders estimated a roughly 62% chance that the BoE would lower rates from a 16-year high of 5.25%, based on derivatives market pricing, similar to Wednesday’s estimates and up from about 58% at the week’s start.
Sterling has declined from a one-year high above $1.30 in mid-July as investor expectations for BoE rate cuts have shifted.
Fed Chair Jerome Powell emphasized on Wednesday that the central bank was also focused on maintaining a healthy labor market, adding importance to Friday’s U.S. jobs report for July.
The report is expected to show that employers added 175,000 jobs in July, down from 206,000 in June. Data on weekly jobless claims is due later on Thursday.
Traders are now anticipating 72 basis points of easing this year. The Fed meeting “has bolstered market expectations that significant rate cuts remain likely, heavily influenced by future economic progress,” said Charu Chanana, head of currency strategy at Saxo.
In other currencies, the Australian dollar was down 0.28% at $0.6518 after dropping 2% in July, impacted by the unwinding of carry trades.
