The Australian dollar fell after that nation’s central bank raised interest rates but suggested the hike was the last of the current tightening cycle, while the euro was hurt by weak German data and the U.S. dollar strengthened on Tuesday as a sharp selloff last week was perceived as short-term overdone. Last week, the US dollar saw a decline following Federal Reserve Chair Jerome Powell’s unexpectedly dovish remarks at the end of the U.S. central bank’s two-day policy meeting on Wednesday, when interest rates were held unchanged. The dollar’s decline was exacerbated on Friday by a weaker-than-expected U.S. employment data. “What occurred last week, which I would argue was a correction, is essentially what this dollar rebound we’re witnessing yesterday and today.
The dollar index, which compares the US currency to its six major rivals, increased by 0.37% to 105.64. It saw its worst weekly decrease since mid-July last week, falling 1.4%. “We got a reversal of some of those positions triggered by the jobs report,” said Chester Ntonifor, foreign exchange strategist at BCA Research. “If you look at the percentage of currencies that have been down versus the dollar over the last 26 weeks, it was approaching 100%, and data also showed very long dollar positioning… Traders now predict three 25-basis-point rate decreases by November of next year and a very limited possibility of another interest rate rise by the Fed. The dollar might continue to weaken as the US economy slows.
The consumer price inflation slowdown and the anticipated drop in retail sales are predicted to be reflected in data the following week, according to Chandler. This “feeds into the headwinds that people are talking about – the resumption of student loans, higher interest rates biting the consumer,” Chandler added. “The dollar’s rally, especially since July, was fueled by a divergence and now we’re going to get convergence – but not because of good news from overseas, but more because we’re getting worse news from the U.S.,” he stated. Investor attention will also be focused on remarks made this week by Fed officials, such as Powell, who is scheduled to appear on Wednesday and Thursday. Given the recent run of strong economic growth, the US central bank may need to take more steps to drive inflation back down to its target of 2%.
He went on to say that if it keeps up, people would start to wonder how long interest rates should stay where they are. Following statistics indicating a greater-than-expected decline in German industrial output in September, the euro dropped 0.37% to $1.0677. According to Fiona Cincotta, senior financial market analyst at City Index, “the data comes after the German manufacturing PMI showed a deep contraction in October and suggests that the sector remains under pressure, acting as a drag on the German economy.” The Reserve Bank of Australia (RBA) lifted interest rates by 25 basis points to battle persistent inflation, as predicted, but signalled that additional tightening was unlikely, which caused the Australian currency to plunge dramatically. Since the RBA’s future guidance was interpreted as being rather dovish, the Australian dollar after an early knee-jerk rise, soon handing up its gains, according to Commonwealth Bank of Australia currency strategist Carol Kong.