Dollar Gains Strength; Yen Returns to Downward Path

By Peter Nurse

Investing.com - The U.S. dollar pushed higher in early European trade Thursday, with buyers returning ahead of next week’s Federal Reserve meeting, while the yen struggled to hold the previous session’s gains.

At 02:50 ET (06:50 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher to 109.593, not far removed from its two-decade peak of 110.79. 

Attention has now switched to next week’s Fed meeting, with traders positioning for the U.S. central bank to become even more aggressive next week in its battle to curb inflation in the wake of Tuesday’s hot consumer prices report.

“This period in the global macro-financial cycle again recalls the early 1980s experience with Paul Volcker at the helm of the Fed. To put the inflation genie back in the bottle, Volcker took policy rates to 15% and was prepared to accept recession as collateral damage,” said analysts at ING, in a note. 

“No one in the market thinks the Fed funds policy rate is going above 10% anytime soon, but [the] … inflation release did see the terminal Fed policy rate re-priced to 4.30% from 4.00%.”

USD/JPY rose 0.4% to 143.64, rebounding after falling 1% in the previous session on reports that the Bank of Japan had checked on exchange rates with banks.

“This is a throwback to the 1990s period of serial Japanese FX intervention where 'checking rates' meant the BoJ FX intervention desk would be asking dealers for direct prices ahead of intervention,” ING added.

However, the Japanese authorities failed to follow through with any concrete measures, and with the Bank of Japan unlikely to raise rates this year and data released Wednesday showing a record Japanese trade deficit for August, yen selling has resumed.

Elsewhere, EUR/USD dropped 0.2% to 0.9960, trading below parity despite the European Central Bank’s historic 75 basis-point hike last week.

The region is still struggling to cope with an energy crisis that shows no signs of easing, with Wednesday’s proposal from the bloc's executive of windfall levies on energy firms to shield consumers from soaring energy prices unlikely to solve the immediate supply issue.

GBP/USD fell 0.2% to 1.1513, with the Bank of England meeting originally scheduled for later this session postponed until next week after the death of Queen Elizabeth II.

U.K. consumer confidence slipped into negative territory for the first time since the pandemic lockdown in the middle of 2020, with market research company YouGov reporting that its reading of sentiment dropped 4.2 points to 98.8 in August.

AUD/USD rose 0.1% to 0.6754 after data showed Australian employment bouncing back in August after a surprise fall the month before, while USD/CNY rose 0.1% to 6.9701, with the Chinese government struggling to shore up economic growth after a series of COVID lockdowns.