Federal Reserve Anticipated to Hold Off on Rate Hike, Dollar Weakens, Yuan Hits Half-Year Nadir

Yuan Hits Half-Year Nadir

Date- June 14, 2023

Place- New Delhi, India

In light of unexpectedly low U.S. inflation data, the U.S. dollar stumbled to nearly a three-week trough against the euro and touched a one-month low versus the British sterling on Wednesday. The prevailing view now is that the Federal Reserve will defer an anticipated interest rate increase set for later in the day. In tandem, China’s yuan hit a 6.5-month low, prolonging its fall after the Chinese central bank opted for a rate cut on Tuesday, fuelling rumors of additional stimulus measures intended to boost China’s stuttering post-COVID economy.

The dollar index, which gauges the U.S. currency against six significant global counterparts including the euro and the sterling, showed negligible movement at 103.29 in early Asian trading. This followed its overnight slump to a low unseen since May 22 at 103.04.

According to Reuters, the U.S. consumer price index (CPI) rose by a mere 0.1% last month, marking the smallest year-on-year inflation increase since March 2021, at 4.0%. As a result, expectations for a quarter-point increase in U.S. interest rates this Wednesday were slashed from 21% chance 24 hours earlier to less than 6%, based on data from CME Group’s FedWatch Tool.

Commenting on these developments, Matt Simpson, a senior market analyst at City Index, suggested that the subdued inflation data has solidified the likelihood of the Federal Reserve holding off on an interest rate hike. Simpson further asserted, “It’s doubtful the modest inflation report will induce a dovish sentiment, considering the CPI is double the Fed’s target.” The analyst also indicated that 103 represents a crucial support level for the dollar index.

The situation caused a temporary uplift for the euro, propelling it above 1.0800 against the dollar, but the euro was unable to maintain that position, given the possibility of a hawkish pause by the Federal Reserve. As of recent data, the euro registered little change, steadying at 1.0791, despite reaching $1.08235 on Tuesday. The European Central Bank (ECB) is slated to decide on its policy on Thursday, with a quarter-point rate hike largely anticipated.

Sterling slid 0.08% to $1.2602, although it had previously climbed 0.8% in the prior session, hitting its peak since May 11 at $1.2625. Meanwhile, the dollar softened by 0.16% to 140.02 yen. Despite the disappointing U.S. inflation data, it had risen to its highest level since June 5 on Tuesday, given that the Bank of Japan is expected to maintain its ultra-easy monetary policy settings this Friday.

The Australian dollar held steady at $0.6768, after achieving its highest mark since May 10 on Tuesday at $0.6807. The currency gained additional support from the People’s Bank of China’s decision on Tuesday to cut the seven-day reverse repo rate for the first time in ten months. China remains a vital destination for Australia’s resource exports.

In a potential turn of events, the next interest rate adjustment could take place as soon as Thursday when the Chinese central bank is due to roll over 200-billion-yuan ($27.93 billion) in medium-term lending facility (MLF) loans.

In offshore trading, the yuan edged down, reaching 7.1785 per dollar, a level not seen since November 29 of last year.”

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