Main menu


US Dollar Index Traders Monitoring UK Powder Keg, Possible BOJ Intervention

featured image

The US Dollar is edging lower against a basket of major currencies early Monday with losses being led primarily by a stronger British Pound. A firm Euro and Japanese Yen are also weighing slightly on the greenback.

At 04:00 GMT, December US Dollar Index futures are trading 112.890, down 0.312 or -0.28%. On Friday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $30.46, up $0.21 or +0.68%.

Risky Situation in the UK

Traders are keying in on the Sterling because of concerns about financial stability with all eyes on the UK bonds now that the Bank of England’s (BOE’s) emergency buying spree is over.

Additionally, Prime Minister Liz Truss’ decision to fire her finance minister might help reassure investors, but her own fate is unclear with media reporting Tory lawmakers will try and replace her this week.

BoE Governor Andrew Bailey warned over the weekend that rates might have to rise by more than thought just a couple of months ago.

“The BoE was doing emergency bond-buying that’s technically identical to QE with one hand, while furiously raising the policy rate with the other,” said analysts at ANZ in a note.

Monday’s market action will provide a test, not only for the survival of Truss’ low-tax vision, but also her political future.”

Euro Firm after Putting in Steady Performance Last Week

US Dollar Index traders are also closely monitoring the price action in the Euro after the common currency flirted with a higher close for the week on Friday.

The Euro is likely being underpinned by the hawkish comments from ECB policymaker Bostjan Vasle. He said on Friday that the European Central Bank (ECB) should raise interest rates by 75 basis points at both of its upcoming meetings this year, then needs to discuss its balance sheet in 2023 as inflation is far too high.

Traders on Japanese Yen Intervention Watch

The Dollar/Yen jumped about 1% to a 32-year high 148.83 on Friday as investors remained focused on the policy divergence between the US Federal Reserve’s aggressive interest rate hikes and the Bank of Japan’s ultra-low rates.

However, there were no changes over the weekend to Japan’s position that it will act resolutely in case of volatility in the currency market, the Kyodo news agency quoted Japan’s Finance Minister Shunichi Suzuki as saying on Saturday.

Short Term Outlook

Although the Federal Reserve’s rapid interest rate increases have contributed to the strength of the dollar against other currencies, it could face some headwinds throughout the week if the British Pound doesn’t collapse due to financial turmoil in its bond market, shorts continue to cover the Euro in anticipation of aggressive rate hikes from the ECB, and if the Bank of Japan decides to intervene to prop up the Japanese Yen.

Over the long run, however, the dollar is expected to remain strong until the Federal Reserve reaches the point of pausing the hikes.

Fed policy “has produced a stronger currency,” St. Louis Fed President James Bullard said on Saturday at a monetary policy panel on the sidelines of the International Monetary Fund and Work Bank annual meetings in Washington. That may ease once the Fed gets rates to a place “where the committee thinks we’re putting meaningful downward pressure on inflation,” so rates don’t need to continue rising, he said.