The Dollar is Strong! Global Currency Markets Face Challenges


Despite strong U.S. economic data, the U.S. and British central banks remain cautious on rate hikes, while the European Central Bank faces internal policy rifts. These factors collectively impact global currency markets.

Despite the dim prospects for global economic growth, investors still express steadfast confidence in the American economy. This has led to the dollar outperforming other currencies, pushing the yen to a 10-month low while fixing the euro and the pound at three-month lows.

In early Asian trading, the dollar reached a high of 147.865 against the yen, marking its highest level since November last year. The dollar rose by 0.05% against a basket of currencies, reaching 104.91, continuing the upward trend from the overnight boost following unexpectedly strong U.S. services sector data in August. The strength of the dollar and robust U.S. economic data also weakened European currencies. The euro fell to its lowest level since June against the dollar, and the pound dropped to a three-month low of 1.2481 overnight against the dollar.

Following the release of the U.S. services sector data for August, Joseph Capurso, head of the International and Sustainable Economics Department at Commonwealth Bank of Australia (CBA), stated that it was undoubtedly excellent ISM data, likely disappointing those who had predicted a short-term recession in the U.S. economy.

According to the Federal Reserve's Beige Book, the recent performance of the U.S. economy has been "moderate," with "soft" job growth and inflation slowing in most regions, which has somewhat curbed the dollar's rise. However, the dollar index has continued to show strong upward momentum, supported by a resurgence in U.S. Treasury yields, strong recent U.S. data, and the gloomy global economic outlook triggered by China.

Capurso noted that the main driver behind the dollar's appreciation is not so much the outstanding performance of the U.S. economy, but rather its relatively better performance compared to other regions. Market pricing on the CME FedWatch tool indicates that even though policymakers are expected to keep rates unchanged later this month, the probability of the Fed raising rates again in November is close to 47%.

Conversely, Andrew Bailey, Governor of the Bank of England (BOE), stated that despite ongoing inflationary pressures, borrowing costs might still rise further, but the BOE's rate-hiking cycle is "nearing its end." Meanwhile, policymakers at the European Central Bank have warned investors that although raising borrowing costs is one of the options, it is still uncertain whether rates will be increased next week.

Capurso found it surprising to hear these dovish remarks from Governor Bailey but said it reinforces the belief that the BOE might only raise rates two more times. As for the European Central Bank, significant disparities among its members might lead investors to believe that the ECB will, at most, raise rates only one more time.

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The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.

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Exchange Rate

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