The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.40% lower and continues to extend its downward movement during the early hours of Friday. The dollar index dropped from a recent high as other major central banks began their policy tightening cycle, with the European Central Bank and Bank of Japan scaling back pandemic-era asset purchases and the Bank of England surprising markets by raising interest rates for the first time since the pandemic began. Meanwhile, the Federal Reserve indicated earlier this week that it will halt its pandemic-era asset purchases in March and boost interest rates three times next year. Elsewhere, US stocks fell sharply on Thursday as a sell-off in tech outweighed the gains in cyclical stocks. The Dow Jones shed 0.1% after hitting a one-month high, while the S&P dropped 0.9% and the tech-heavy Nasdaq plunged 2.5%. US stock continues to trend downwards while heading into Friday's session. Looking ahead, market participants will watch out for Fed’s Member Christopher Waller’s speech to provide fresh momentum to the dollar index.
The Euro closed 0.36% higher against the dollar and continues to extend its upward movement while heading into Friday’s session. The main currency pair has lately benefited from the European Central Bank's (ECB) cautiously optimistic movements and has been favoured by lower US Treasury rates, which weigh on the US dollar. The European Central Bank (ECB) signalled hawkish performance by announcing the end of the Pandemic Emergency Purchase Program (PEPP) in March 2022, as well as reducing the pace of the Assets Purchase Program (APP) to €40 billion each month in Q2 and €30 billion in Q3 2022, citing the progress in economic recovery and towards its medium-term inflation target. Following that, The annual inflation rate in the Eurozone rose to 4.9% in November from 4.1% in October, matching the estimates. Moving on, traders will be interested in the German IFO numbers for December to provide further direction to the Euro.
The Sterling closed 0.46% higher against the greenback and continued its mild growth against the US dollar in Friday's early trading session. The British pound soared after the Bank of England hiked interest rates for the first time since the epidemic began, surprising investors that had predicted no change. Due to a surge in inflation and worries over a faltering economic recovery in the UK, policymakers agreed by an 8-1 vote to increase the Bank Rate by 15 basis points to 0.25%. The central bank has reduced its growth predictions for December and the first quarter of 2022 due to the spread of the Omicron variant, while inflation is expected to continue around 5% for the duration of the winter season, peaking at roughly 6% in April 2022. Additionally, the Sterling was influenced by the higher than expected macro data release, where Retail sales in the UK rose 1.4% in November of 2021, above forecasts of 0.8%. Following that, The FTSE 100 climbed 1.3% on Thursday, ending a six-day losing streak and recovering from two-week lows after the BoE rate hike decision followed by trading at lower levels while entering into Friday’s session. Looking forward, Market participants will use broad market sentiments and Omicron chatters to seize short-term trading opportunities around Sterling.
The Japanese Yen closed 0.32% higher versus the US dollar before marginally extending its uptrend on Friday morning. A softer risk tone, stemming from omicron concerns and fresh impositions of restrictions in Europe and Asia, coerced investors to take refuge in safe-haven Yen. Additionally, the Bank of Japan (BoJ) has decided to taper its corporate debt purchases to pre-pandemic levels and scale back portions of its emergency funding plan beginning in April 2022, while continuing to assist small and medium-sized businesses for another six months. The BOJ also kept its short-term interest rate unchanged at -0.1% and its 10-year bond yield objective at about 0%, as largely predicted. Following that, the Nikkei 225 Index dropped 1.79%, while the Topix Index dipped 1.42%. Moving ahead, traders will look out for broader market sentiments and U.S. Treasury yield dynamics to provide fresh momentum to the Yen.
The Loonie closed 0.42% higher against the greenback followed by losing its momentum and heading lower when entering into the European trading session. The Canadian dollar traded higher yesterday due to a weakening US dollar, remarks from Bank of Canada officials, rising oil prices, and favourable economic data. The dollar index fell as the Fed avoided any radical changes to its monetary policy, stated it would accelerate bond purchases, and set the stage for three interest rate rises by the end of 2022. Meanwhile, in response to increasing inflation, the Bank of England raised its borrowing rates, while the ECB slowed its bond-buying pace. Domestically, Bank of Canada Governor Tiff Macklem said that the observed economic recovery has helped to significantly reduce the slack produced by the Covid-19 epidemic, implying that the Bank of Canada may be ready to boost rates soon. In addition, recent economic figures reveal that Canada created 231.8k jobs in November, marking the fourth straight month of growth. Following that, WTI crude oil prices dropped on Friday morning, down by 0.60% which pulled down the commodity-linked Loonie during the early parts of the day. Moving ahead, traders will get cues from broader market sentiments and Crude oil prices to provide further direction to the Loonie.
The Mexican peso closed 0.90% higher versus the greenback, marking the currency's second consecutive day of closing higher against the US dollar. This appears to follow the Bank of Mexico's (Banxico) statement of monetary policy decision. The monetary authority decided to raise the reference interest rate by 50 basis points to 5.50% at its last meeting of the year. The higher-than-expected increase leads to a reduction in market concern of inflation. Additionally, the Banxico spokesperson mentioned that by taking this move, the monetary policy stance is adjusted to the path necessary for inflation to converge to its objective of 3%. The dollar, on the other hand, contributed to the Peso's recovery by dropping 0.4% at the close yesterday. Looking forward, traders, in absence of any major economic data release, will use broader market sentiments to seize short term trading opportunities around the Peso.
The Chinese Yuan closed 0.02% down against the U.S. dollar. On Friday, the offshore yuan continued to drop modestly against the US dollar as traders reduced long positions on concerns that authorities might halt down the currency's recent rise. Since mid-November, the People's Bank of China's official midpoint has consistently been lower than market forecasts. The central bank has also increased its purchases of foreign currency from banks and increased the foreign exchange reserve requirement ratio by 200 basis points to 9% effective December 15. Following that, China's commerce ministry revealed that foreign direct investment into China increased 15.9% annually to CNY 1,042.2 billion (USD 157.2 billion) in the first 11 months of the year, while the stock market shows negative readings as Shanghai Composite Index fell 1.16% and the Shenzhen Component Index fell 1.62% on Friday, dragged down by consumer firms amid concerns over a resurgence of Covid cases, while coal miners retreated from recent run-ups.
The Brazilian Real closed down 0.30% against the U.S. dollar and it traded around a 7-week low level despite a weakening dollar, while investors' believe that the Brazilian economic recovery has started to surrender to increasing inflation and higher interest rates, both of which are weighing on the currency's appeal. Meanwhile, minutes from Brazil's central bank revealed that the monetary authority had decided a rate rise of more than 150 basis points due to worries about fiscal deterioration. On the other hand, the Brazil Economic Activity Index (IBC-Br) showed a monthly preview of GDP, which fell by 0.4% in October, falling short of estimates of a 0.2% drop and marking the third straight negative reading. Domestically, the text of the so-called Precatorios Bill was approved in the second round of debate in the Lower House, and it will now be passed by the National Congress.