Dollar Strengthens as Central Banks Cut Rates
The dollar is on track for a second week of gains, driven by a slight rate hike in Japan and a surprise cut in Switzerland. The Swiss National Bank (SNB) and central banks in developing countries have either cut rates or indicated their intention to do so. This shift in global monetary policy has highlighted the disparity between the Federal Reserve and other central banks. Despite the yen experiencing a slight reprieve, the dollar has risen against all G-10 currencies due to the strong U.S. economy and high interest rates.
Swiss Rate Cut Sparks Speculation
The Swiss rate cut, which is the first by a major European central bank, has raised speculation about potential cuts by other central banks in Europe. This unexpected move by the SNB has led analysts to consider its implications for monetary policy in the region. While the Fed has left its overnight rate unchanged, it has projected three cuts by the end of the year. However, it also stated that it will not cut rates until it sees sustainable declines in inflation toward its 2% target.
Market Reactions
As a result of these developments, about 84 basis points of cuts are priced in for this year. This is significantly lower than the 160 basis points at the beginning of the year but higher than earlier predictions throughout the week as rate cut expectations gained momentum. Consequently, sterling dropped 0.5%, reaching a one-month low, after a 1% drop when the Bank of England decided to keep rates unchanged. The bank did reveal a more dovish stance as two previously hawkish committee members changed their call for a hike.
The Swiss franc, which has been the best performing G-10 currency this year, lost approximately 1.7% against the dollar this week and 6.8% year-to-date. The dollar index, which measures the U.S. currency against six major trading partners, rose by 0.45%. However, the dollar weakened by 0.12% against the Japanese yen at a rate of 151.44 per dollar. Despite this slight dip, the dollar has experienced a 1.5% increase against the yen this week after approaching levels that prompted Japanese intervention in 2022.
The euro also faced downward pressure due to the strengthening dollar, reaching a three-week low and trading down 0.5% at $1.0806. Additionally, the Bank of Japan’s announcement of an historic shift out of negative short-term rates and longer-run yield caps led to a fall in the yen.
Concerns Over China’s Currency
In China, expectations for policy easing have put pressure on its currency, resulting in a sharp drop in the onshore session. This decline has unsettled equity investors and prompted state banks to intervene. The Chinese yuan traded at 7.229 per dollar in onshore trading, while in offshore trading, the dollar experienced its largest one-day rise against the yuan in a year, increasing by 0.77% to 7.2769.
Bitcoin Faces Weekly Drop
Bitcoin is set for its largest weekly drop since August last year, with a roughly 6.7% fall. The cryptocurrency market has taken a step back from its powerful rally earlier in the week. Bitcoin’s price has fallen by approximately 13% since reaching a record high close to $74,000 last week.
Hot Take: Dollar Strength Continues Amidst Global Monetary Policy Shifts
The dollar’s strength persists as central banks around the world cut rates or consider doing so. The Swiss rate cut has sparked speculation about potential cuts by other European central banks, and the disparity in interest rate policies between the Federal Reserve and other central banks has become more evident. Despite the yen experiencing a slight reprieve, the dollar remains strong against most G-10 currencies due to the robust U.S. economy and high interest rates.
By
By
By