Hawkish Fed Drives Dollar’s Rebound

Federal Reserve Chair Jerome Powell’s hawkish comments at the congressional testimony lifted the Dollar higher against most currencies during the week spanning June 16 to 23. Though Bank of England, Swiss National Bank and Norway’s central bank, all raised rates during the week, it was Fed fears that primarily dented major currencies during the week.

The Dollar Index or DXY, a measure of the U.S. Dollar’s strength against a basket of currencies comprising Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc gained 0.65 percent over the course of the turbulent week. The DXY closed at 102.90 on June 23, versus 102.24 a week earlier, after ranging between a low of 101.92 on Thursday and a high of 103.17 on Friday.

Federal Reserve Chair Jerome Powell in his two-day semi-annual Senate Banking Committee hinted of at least two more rate hikes in the year to combat persistent inflation, fueling the greenback’s rally. In its recent review, the Fed had skipped a rate hike to assess the cumulative effect of monetary tightening. Less-than-expected rate cut by China and downgrades to its GDP forecasts also generated safe haven currency market sentiment in favor of the greenback. Strong housing data also supported the Dollar.

The euro dropped 0.40 percent against the U.S. Dollar, to finish trading at 1.0889 on June 23 versus 1.0933 a week earlier. The common currency which had touched a high of 1.1012 on Thursday dropped to the week’s low of 1.0843 on Friday amidst sentiment dampened by disappointing PMI data. The European Central Bank had as widely expected in the previous week hiked rates by 25 basis points but is apparently divided over future course of rate action.

Despite the more-than-expected 50-basis points rate hike by the Bank of England, the sterling shed 0.83 percent against the U.S. Dollar during the past week. Though consumer price inflation, which was seen falling to 8.4 percent was steady at 8.7 percent, the BoE was widely expected to raise rates by 25 basis points. From the week’s high of $1.2839 touched on Thursday, the pound plunged to $1.2686 on Friday. The GBP/USD pair finished the week at 1.2711 versus 1.2817 a week earlier, amidst deepening recession fears.

Though the risk-sensitive Australian Dollar edged higher after the release of the minutes of the Reserve Bank of Australia’s monetary policy meeting on Monday, the rally soon fizzled. The minutes revealed a debate between a pause and a hike. The Australian Dollar steadily declined against the U.S. Dollar, losing 2.91 percent over the course of the week. The steep fall in commodity prices exacerbated the currency’s decline and the AUD/USD pair closed at 0.6677, versus 0.6877 a week earlier. The pair had touched the week’s high of 0.6890 on Monday and the low of 0.6662 on Friday.

The Japanese yen also lost around 1.3 percent against the U.S. Dollar during the week ended June 23. The yen’s weakness comes amidst Bank of Japan sticking to its ultra-dovish monetary policy stance even as core CPI climbed to a 42-year high in the month of May. The pair rose from the low of 141.21 touched on Tuesday to a high of 143.93 on Friday. The USD/JPY pair finished the week at 143.68, rising from the level of 141.82 on June 16.

Political chaos in Russia over the weekend has also impacted sentiment in the currency market. The Fed-preferred PCE inflation readings are due form the U.S. by the end of the week and is bound to aggravate monetary policy concerns. The CME FedWatch tool currently shows a 74.4 percent for quarter-point rate hike by the Fed in The July meeting.

Amidst these developments the DXY has declined to 102.72. The EUR/USD pair has strengthened to 1.0911 whereas the GBP/USD pair has edged lower to 1.2707. The AUD/USD pair is steady at 0.6675 whereas the USD/JPY pair has declined to 143.59.

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