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Dollar maintains strength as market watches inflation and Fed rate moves

June 3, 2024

Key points:

  • The dollar index remained steady at 104.58 on Monday, reflecting a 1.56% decline in May but up 3% for the year.
  • Emerging market currencies, particularly the Indian rupee and Mexican peso, showed strength following positive election results in both countries.

The dollar remained stable on Monday as traders speculate that U.S. inflation may have stabilised enough for the Federal Reserve to consider rate cuts later in 2024. Meanwhile, the euro held firm ahead of an anticipated rate cut by the European Central Bank (ECB) this week.

Emerging markets continue to see rise

Among emerging market currencies, the Indian rupee and Mexican peso strengthened following favorable exit poll results from general elections in both countries. The Indian rupee, the best-performing Asian currency this year, was last seen at 83.035 per dollar.

This boost comes as exit polls suggest a mandate and a rare third term for Prime Minister Narendra Modi.

Similarly, the Mexican peso rose to 16.95 after the country’s ruling party declared Claudia Sheinbaum the winner of the presidential election by a “large margin” after polls closed on Sunday.

Dollar index and inflation data

The dollar index, which measures the U.S. currency against six rivals, stood at 104.58 on Monday. It posted its first monthly decline of the year in May, dropping by 1.56%, influenced by shifting expectations on when and by how much the Federal Reserve will cut rates.

Markets are currently pricing in 37 basis points of cuts from the Fed this year. On Friday, data showed the personal consumption expenditures (PCE) price index increased by 0.3% in April, consistent with the previous month’s unrevised gain.

This indicates that price pressures remain above the Fed’s 2% target, with the year-over-year rise in the PCE index measuring 2.7% in April, the same as in March. Traders are now pricing in about a 53% chance of a September rate cut, up from 49% before the report.

ECB outlook

The euro last fetched $1.08555 ahead of the ECB policy meeting on Thursday, where a rate cut is almost certain.

Market participants will focus on comments from ECB officials and economic projections to gauge the likelihood of further cuts, especially in light of recent data showing a rise in eurozone inflation in May.

Markets are pricing in 57 basis points of cuts this year from the ECB.

Intervention for the Japanese Yen

Data released on Friday by Japan’s Ministry of Finance confirmed that authorities spent 9.79 trillion yen ($62.23 billion) intervening in the foreign exchange market to support the yen over the past month. This intervention came after the yen hit a 34-year low of 160.245 per dollar on April 29 and again in the early hours of May 2 in Tokyo.

USD/JPY chart displaying a 30-minute timeframe with a trend of 0.09%. The chart shows the opening price at 157.106, closing at 157.253, and a high of 157.471. The chart includes moving averages and MACD indicators, highlighting the dollar's maintained strength as the market watches inflation and potential Federal Reserve rate moves. Recent data reveals Japan's Ministry of Finance intervened in the forex market, spending 9.79 trillion yen to support the yen after it hit a 34-year low against the dollar.

SEE: The US dollar continues gaining ground against the Yen, as seen on the VT Markets app.

As of Monday, the yen slid slightly to 157.42 per dollar, close to the four-week low of 157.715 it touched last week. This intervention is reminiscent of past efforts by Japanese authorities to stabilise the yen, such as the interventions following the Tōhoku earthquake and the Fukushima nuclear disaster.

Trader attention this week will be on the ISM manufacturing survey later in the day and payroll data on Friday to gauge the strength of the U.S. labor market.

Cautiously, we observe that while the current data suggests stability, the potential for market shifts remains, warranting close attention to upcoming economic indicators and policy decisions.

For traders looking to navigate these evolving markets, staying informed and making timely decisions is of utmost importance.

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