Here’s what comes next for the world’s major currencies as the Fed moves and global growth fears weigh on currency markets
- The US dollar has climbed against major currencies this year, including a 24% rise against the Japanese yen.
- Federal Reserve rate hikes are a key driver of the dollar’s rise, but there are others at play as well.
The Federal Reserve is the main driver of the dollar’s rise, with policymakers attacking hot inflation with steep interest rate hikes to slow economic activity. The Fed’s fifth rate hike this year is due Wednesday and will push the federal funds rate up from its 2.25% range to 2.5%.
With the Fed in the spotlight, investors’ views on an economy‘s competitive strength can serve as a medium-term driver for currencies, said Marc Chandler, managing director of Bannockburn Global Forex. In this regard, changes in the global trading environment and growth concerns are contributing to the weakness of dollar rivals. The US dollar index reached 20-year highs and gained 14% this year.
Here’s a look at what’s pushing the Yen, Euro and Chinese Yuan.
The yen plunged 24% against the greenback in 2022. The dollar recently rose above 145 yen for the first time in 24 years. The yen trade was “fascinating” with the Bank of Japan’s commitment to buying bonds to keep its Return over 10 years capped at 0.25%, Edward Moya, senior market analyst at Oanda, told Insider.
Since 2016, the BOJ has controlled its yield curve to increase inflation. With the Fed’s aggressive rate campaign, the 10-year US Treasury yield surged nearly 3.5%, making bonds more attractive relative to those in Japan and weighing on the value of the yen.
“The Japanese economy is struggling to trigger inflation…and now we may be seeing inflation with wage growth which may cause the Bank of Japan to change policy sometime next year,” Moya said.
The next BOJ policy statement is due on Thursday. Bank of America sees “no change” in yield curve control despite global central bank interest rates (minus China) rising. BofA expects the dollar to rise to 150 yen on “rate spreads, debasement fears and capital flight.”
Meanwhile, the world’s third-largest economy is experiencing a negative terms-of-trade shock, Chandler said.
“Japan imports most of its food and energy. The price of food and energy has increased much faster than [those of its] manufactured goods. So Japan, like Europe, went from trade surpluses to trade deficits,” he said, noting another factor that hurt the yen.
The common eurozone currency has lost 13% against the dollar this year, falling below par for the first time since 2002, with perhaps even more of a fall. Barclays has a forecast of $0.9800 for the fourth quarter of 2022 and the first quarter of 2023. It was trading at $0.9950 on Friday.
Russia’s curtailment of gas flows to Europe has sent gas and electricity prices skyrocketing and forced the European Union to rush to stockpile gas ahead of winter.
“The Eurozone economy is so weak and with rising prices, it’s causing an economic slowdown. People are struggling to make ends meet,” Fawad Razaqzada, market analyst at Forex.com, told Insider. “For businesses, this has increased input costs in terms of energy. Sentiment towards the euro is quite weak even though the [European Central Bank] raises interest rates because of their price control mandate.” Eurozone inflation in August hit a record high of 9.1%.
Europe’s energy crisis may not be fully priced into the euro until the winter season, as that is when it will become clearer whether or not the region has sufficient energy supplies, Moya said. “A lot of it will depend on the weather. Europe looks vulnerable…and it’s going to be tough for the euro for the rest of the year.”
The yuan this week dropped to one two-year low against the dollar, with the greenback rising above 7 yuan to the dollar. The Chinese currency has lost nearly 10% this year. The People’s Bank of China has struggled to provide upside support in recent weeks, in part by setting the currency’s daily rate above market expectations as it prepares for the next rate hike in China. the Fed.
Friday’s economic data included August retail sales and industrial production that beat expectations, but the yuan fell.
“China’s economy is struggling, make no mistake about it,” Razaqzada said. “His zero COVID policy is weakening the momentum the economy is gaining in terms of growth. As long as the policy remains in place, it is very difficult to see a way out for the yuan.” He sees the greenback soon climbing to 7.20 the yuan.
Friday’s data also showed falling sales and prices in China’s property sector, an important growth engine for the world’s second-largest economy.
“His cash register broke,” Chandler said of the housing market ahead of the data. “What is the next development model and how can you minimize the damage? are questions China must answer, he said.