Dollar Rises To 6-month High Amidst Growing Monetary Policy Divergence

(RTTNews) - The Dollar renewed its resilience in the week ended September 22, a period marked by divergent monetary policy stances by central banks worldwide. The Fed's unwavering hawkishness that coincided with a monetary policy pause by several central banks abetted the Dollar's surge against major currencies.

In decisions made during the course of the week, the Bank of England, the Bank of Japan, Peoples Bank of China and the Swiss National Bank stayed pat on rates whereas central banks of Sweden and Norway raised rates by 25 basis points. The ECB had in the week earlier raised rates by 25 basis points but hinted at a dovish pivot.

The Dollar Index or DXY, a measure of the Dollar's strength measured against a basket of 6 currencies gained a quarter percent during the week spanning September 18 to 22 as the Fed's hints meant higher interest rates for a longer period. The DXY, which opened the past week at 105.30, slipped to the weekly low of 104.67 on Wednesday. A hawkish hold by the Fed resulted in the index rising all the way to 105.74 on Thursday and a six-monthly high of 105.78 on Friday. Though the DXY shed some of the week's gains on Friday, falling to 105.32, it finally ended the week at 105.58, versus 105.32 a week earlier.

The Fed on Wednesday maintained status quo on rates but warned of another rate hike before the end of the year. It lifted the inflation forecast for 2023 to 3.3 percent, versus 3.2 percent projected in June. The median federal funds rate for 2024 which the Fed had projected in June to fall from 5.6 percent to 4.6 percent was also revised and is now projected to fall from 5.6 percent to 5.1 percent only. The Fed's acknowledgement of persisting inflationary pressures and the stress on the importance of restoring price stability powered the Dollar's rally over the course of the week. The spike in the prices of crude oil, the inflationary concerns it triggered, the fears about potential interest rate hikes, and the resultant spike in bond yields to multi-year highs also contributed to the Dollar's uptick.

The euro traded flat against the U.S. Dollar during the past week, even as markets digested the Fed's hawkish hold with the European Central Bank's dovish hike in the previous week. The EUR/USD pair closed the week at 1.0652 versus 1.0655 a week earlier, amidst speculation about whether the economic conditions in the eurozone could warrant an aggressive monetary policy stance by the ECB. Despite the flat levels at closing, the pair ranged between the high of 1.0738 touched on Wednesday and the six-month low of 1.0614 touched on Friday.

The British pound slipped more than 1 percent against the U.S. dollar during the week spanning September 18 to 22. The Bank of England had on Thursday, defying expectations, maintained rates on hold in the backdrop of an unexpected drop in inflation. The GBP/USD pair dropped to 1.2238 on Friday, from 1.2389 a week earlier. The pair ranged between the high of 1.2426 touched on Tuesday and the low of 1.2230 touched on Friday.

The Aussie edged up against the U.S. dollar, adding 0.14 percent during the week ended September 22. Minutes of the Reserve Bank of Australia released in the beginning of the week that showed the central bank had initially contemplated a hike before ultimately settling for a pause benefitted the Australian Dollar. Better-than- expected economic data released recently from China also supported the Aussie's climb. The AUD/USD pair closed the week at 0.6441 as compared with 0.6432 a week earlier. The week's trading range was between 0.6513 and 0.6385.

The Bank of Japan sticking to its ultra-dovish monetary policy stance weakened the Japanese yen against the U.S. dollar. The yen slipped 0.37 percent against the U.S. dollar resulting in the USD/JPY pair rising to 148.37, from 147.82 a week earlier. The pair touched the weekly low of 147.32 before the BoJ decision and the weekly high of 148.46 after the BoJ announcement revealed no intention to wind down its large-scale stimulus programme.

Currency markets now await the preliminary inflation readings for September from Germany, France and Euro Area to reassess the interest rate expectations. The Fed's preferred PCE readings are due from the U.S. on Friday which would also hold sway over the Dollar's fortunes. Final second-quarter GDP numbers from the U.S., manufacturing PMI data from China as well as other economic indicators due over the course of the week could shape currency market movements to a great extent.

Amidst these developments, the Dollar Index has risen to 105.63. The EUR/USD pair dropped to 1.0639 whereas the GBP/USD pair is at 1.2239. The AUD/USD pair also declined to 0.6435. The USD/JPY pair has further increased to 148.62 amidst the sliding yen stoking speculations about government intervention.