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HomeNews WireDollar Holds Just Below Six-Month High as ECB Signals Last Rate Hike

Dollar Holds Just Below Six-Month High as ECB Signals Last Rate Hike

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The U.S. dollar remains strong, just below a six-month high, following positive U.S. economic data, while the yuan has received a boost from better-than-expected Chinese data. This has led to adjustments in the markets as investors assess the outlook for central bank rate hikes. The European Central Bank (ECB) recently raised rates to a record high of 4%, but indicated that this could be its last hike. As a result, euro zone bond yields and the euro fell, with the expectation that the central bank may start cutting rates next year.

Currency markets are now particularly focused on the divergence between the ECB and the U.S. Federal Reserve’s monetary policy plans. Joel Kruger, a currency strategist at LMAX Group, highlights that this divergence could lead to continued pressure on the Fed to consider higher interest rates, while other central banks are pricing in peak rates. This potential scenario suggests that the U.S. dollar could experience further upside.

As of 0756 GMT, the U.S. dollar index was down 0.2% at 105.22, compared to Thursday’s peak of 105.43. However, it is still on track for its ninth consecutive weekly gain. U.S. retail sales in August exceeded expectations, primarily due to higher gasoline prices, which boosted receipts at service stations.

The euro, on the other hand, has shown slight recovery, up 0.2% at $1.06625 from Thursday’s multi-month low of $1.0632. ING FX strategist, Francesco Pesole, predicts that the euro-dollar pair will be driven more by the dollar leg. He suggests that the markets have accepted the idea that the ECB has potentially peaked, meaning that euro zone data releases may lose some market relevance.

The yuan experienced a boost from positive economic data in early Asian trading. Industrial output and retail sales showed faster-than-expected growth in August. However, the yuan weakened after the People’s Bank of China (PBOC) announced a second 25-basis point cut to banks’ reserve requirement ratio this year, in an effort to support the shaky economic recovery. Analysts argue that downward pressure on the yuan remains, given the uncertainty surrounding China’s economic recovery.

Analysts, such as Joel Kruger from LMAX, believe that there have been no significant structural changes to suggest a major reversal for the yuan. Kruger suggests that this period of weakness may just be a pause in the currency’s trajectory.

The Australian and New Zealand dollars, known as commodity currencies, have also seen an increase. The Australian dollar is up 0.3% at $0.64575, while the New Zealand dollar has risen 0.1% to $0.5917. This rise can be attributed to the increase in energy prices, with oil set to gain for the third consecutive week.

Overall, currency markets are closely watching the divergence in monetary policies between the ECB and the U.S. Federal Reserve. The U.S. dollar remains strong, while the yuan has received a temporary boost but faces ongoing downward pressure. Commodity currencies have benefited from rising energy prices.

More detail via Yahoo! Finance here… ( Image via Yahoo! Finance )

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