OPEC’s Surprise Output Cut Sparks Brief Dollar Rally

The surprise output cut announced by the OPEC on April 2 gave the Dollar strong momentum in the beginning of the week spanning April 3 -7. The OPEC, which met on Sunday announced an output cut of 1.16 million barrels per day. The surprise move triggered renewed fears of heightened rate hikes by central banks the world over and swayed currency market sentiments.

From the previous close of 102.51 on March 31, the Dollar Index (DXY), which measures the strength of the Dollar against a basket of six currencies, surged to the weekly high of 103.06 on Monday April 3. The output cut triggered a reassessment of the impact of fuel price-led inflation and the prospect of further rate hikes by the Fed.

However, the dollar’s gains were short lived as data released on Monday showed the U.S. manufacturing sector falling deeper into recession. The ISM manufacturing PMI for the month of March dropped to 46.3, from 47.7 in the previous month and expectations of 47.5 percent. The services sector PMI also dropped to 51.2 from 55.1 in the previous month and expectations of 54.5 percent.

The DXY dropped to the week’s lowest level of 101.42 by Wednesday before rebounding and finishing the week’s trade at 102.09 amidst relatively strong payrolls data. Data released on Friday showed a resilient labor market as the American economy added 236 thousand jobs in the month of March versus expectations of an addition of 239 thousand. Also, the unemployment rate dropped to 3.5 percent in March from 3.6 percent in the previous month. Amidst these developments, the DXY shed 0.41 percent over the course of the past week.

The EUR/USD pair gained 0.54 percent during the week ended April 7, strengthening to 1.0897, from the level of 1.0839 a week earlier amidst hints of the ECB continuing its aggressive rate hikes. The pair touched the week’s low of 1.0788 on Monday and the week’s high of 1.0974 on Tuesday.

The British Pound too strengthened against the U.S. Dollar over the course of the past week. The pound gained 0.65 percent against the Dollar to close at 1.2413 versus 1.2333 at the end of the previous week. From the week’s low of 1.2274 touched on Monday, the pair quickly surged ahead to the week’s high of 1.2527 on Tuesday. The pound’s surge to a ten-month high is despite dovish comments from a BoE official that called for faster than expected rate cuts.

The Australian Dollar however weakened 0.25 percent against the Dollar in the week spanning April 3 to 7. The Reserve Bank of Australia had as expected held rates steady at its meeting on Tuesday. The pair dropped to 0.6668 from the level of 0.6685 at the end of the previous week. The week’s high of 0.6794 was touched on Tuesday whilst the week’s lowest point of 0.6640 was touched on Friday.

Like the euro and the British pound, the Japanese yen too strengthened against the Dollar in the week ended April 7. The USD/JPY pair dropped half a percent to 132.13. from 132.79 at the end of the previous week. The week’s high of 133.76 was touched on Monday and the low of 130.63 was touched on Wednesday.

Currency markets now look forward keenly to the consumer price inflation readings due from the U.S. on Wednesday. Whilst headline inflation is seen falling to 5.2 percent from 6 percent earlier the core inflation is seen rising to 5.6 percent from 5.5 percent in the previous month.

The minutes of the previous Federal Open Markets Committee is also due on Wednesday. Amidst anxiety on further cues related to the monetary policy trajectory, the Dollar Index is currently at 102.19. The EUR/USD pair has moved up to 1.0911 whereas the GBP/ USD pair has increased to 1.2434. The AUD/USD pair is now at 0.6660. The USD/ JPY pair is at 133.06.

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