Dollar Rises Despite The U.S. Sovereign Rating Downgrade

The U.S. dollar rose against major currencies during the week spanning July 31 to August 4, in spite of the market turbulence that followed the sovereign rating downgrade of the U.S. Amidst weakness in the equity market, the Dollar shrugged off the rating downgrade to rise against the euro, the British pound, the Australian Dollar and the Japanese yen.

Global rating agency Fitch Ratings on Tuesday downgraded the U.S. Long-Term Foreign-Currency Issuer Default Rating to ‘AA+’ from ‘AAA’. It removed the “Negative” Rating Watch and assigned a Stable Outlook. The Country Ceiling has however been affirmed at ‘AAA’.

The Dollar Index or DXY, which measures the Dollar’s strength against a basket of 6 currencies increased 0.39 percent during the week. The DXY, which traded below 102 levels on Monday increased steadily to touch a high of 102.84 on Thursday, August 3. Amidst a mixed job market update it dropped to the week’s low of 101.74 on Friday before rebounding to close the week’s trading at 102.02. The DXY had finished the previous week at 101.62 amidst anxiety ahead of the monthly job market update.

Data released on Friday by the U.S. Bureau of Labor Statistics showed an addition of 187 non-farm payrolls in the month of July, rising from the downwardly revised 185 thousand in the previous month. Markets were expecting a lower addition of 200 thousand as compared to the original reporting of 209 thousand. Unemployment rate which was seen steady at 3.6 percent decreased to 3.5 percent. Average hourly earnings on a year-on-year basis remained steady at 4.4 percent. Markets had expected the same to fall to 4.2 percent. The mixed job market update added to the uncertainty about the monetary policy, dragging the Dollar lower.

Though the week witnessed the release of manufacturing and service PMI numbers as well as data on Job Openings and the ADP National Employment Report, the rating downgrade remained the primary theme for the currency market.

The euro edged lower against the U.S. dollar, dropping to $1.1010, from $1.1015 a week earlier. The EUR/USD pair ranged between the weekly high of 1.1047 traded on Monday and the weekly low of 1.0912 touched on Thursday. Flash second quarter GDP readings from the Euro Area released on Monday had revealed a year-on-year growth of 0.6 percent, higher than the market consensus of 0.5 percent but lower than the 1.1 percent expansion in the previous period. Preliminary readings also revealed that inflation in July declined as expected to 5.3 percent, from 5.5 percent in the previous period. Both the readings pointed to a lower likelihood for the ECB to aggressively extend its tightening cycle, weakening the appeal of the common currency.

The British pound shed 0.79 percent against the U.S. dollar, during the week ended August 4. The GBP/USD pair closed at 1.2748, versus 1.2850 a week earlier. The pair slipped from a high of 1.2874 on Monday to the low of 1.2622 on Thursday. The Bank of England had on Thursday raised its policy interest rate by 25 basis points to 5.25 percent, lower than the 50 basis points hike in the previous review.

The Aussie slipped more than a percent against the U.S. dollar amidst the Reserve Bank of Australia skipping a rate hike for the second consecutive time and almost signaling an end to tightening. Markets had expected a hike of 25 basis points. The AUD/USD pair closed the week at 0.6569, versus 0.6649 a week earlier. The pair which had traded at a high of 0.6740 slipped steadily after the RBA decision, to as low as 0.6513 on Thursday. The antipodean currency was also pressured by the official PMI readings from China remaining in the contraction phase.

The Japanese yen declined around half a percent to the U.S. dollar during the week ended August 4. The USD/ JPY pair closed at 141.75, versus 141.15 a week earlier. The pair traded between 143.90 and 140.69 during the week, amidst a spurt in bond yields triggered by the yield curve control tweak announced a week earlier.

Though currency markets have shrugged off the rating downgrade, it continues to wait anxiously for the next inflation readings due from the U.S. on Thursday. Before that, trade and inflation readings would be released from China on Monday and Tuesday. The DXY has edged up to 102.10. Bond yields have hardened amidst expectations that headline inflation in U.S. in July would have risen to 3.3 percent, from 3 percent in the previous month. The EUR/USD pair has decreased to 1.0993 whereas the GBP/USD pair has increased to 1.2760. The AUD/USD pair is currently trading at 0.6567. The USD/JPY pair has jumped to 142.19.

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