Date
20 October 2017
James Bullard, president of the St. Louis Federal Reserve Bank, said the United States has maintained low interest rates for an excessively long time, and this could cause instability for financial markets. Photo: Bloomberg
James Bullard, president of the St. Louis Federal Reserve Bank, said the United States has maintained low interest rates for an excessively long time, and this could cause instability for financial markets. Photo: Bloomberg

Rising rate hike expectations boost US dollar

The market has become more cautious ahead of Federal Reserve chief Janet Yellen’s speech this week.

Minutes of the last Federal Open Market Committee meeting show rising odds for a rate hike in June or July, and this has boosted the US dollar.

St. Louis Fed president James Bullard said the United States has maintained low interest rates for an excessively long time, and this could cause instability for financial markets.

But he said the referendum in the United Kingdom may not affect the Fed’s rate policy.

The sterling fell back against the dollar last Friday and tumbled to 1.4459 in early trading on Monday.

Market participants are adjusting some positions, and that has dragged the sterling.

The technical chart shows the sterling has further downside to 1.44. On the upside, the resistance level is around 1.455 to 1.463.

Meanwhile, the euro is poised for a further drop this week after breaking the 50-day moving average of 1.13 against the US dollar last Wednesday. It could slip further to 1.1 or even 1.08.

The Japanese government said despite the loss of several dozens of billions of dollars from the earthquake last month, the economy is still on a “steady yet somewhat slow or moderate recovery path”.

It’s less optimistic about corporate earnings, as a reflection of global economic slowdown and financial market turmoil.

The yen rallied on Monday on the back of increasing safe-haven demand.

The US issued fresh warnings on currency intervention last week, while a sell-off in global equities has stimulated demand for the yen. The US dollar eased to 109.08 against the yen, after touching a three-week high of 110.58 late last week.

US Treasury Secretary Jacob Lew on Saturday kept up the pressure on Japan not to devalue its currency during the G7 meeting finance ministers. The disagreement might hamper further moves from the Bank of Japan.

It was reported that Japanese Finance Minister Taro Aso hinted that he would be happy to see the yen stabilize at the 109 level.

Technical analysis shows that the US dollar may weaken further against the yen to 108.65 or 108. The dollar may be able to regain the upward momentum unless it returns above 110.

Reserve Bank of Australia governor Glenn Stevens stressed that his country would stick to a 2 to 3 percent medium-term inflation target, after a surprise rate cut of 0.25 percent triggered market debate. Stevens will step down in September.

The Australian dollar fell against the US dollar to 0.7155 on Tuesday, as commodities and stocks plunged again.

It marks the lowest level in nearly three months. The Aussie has lost nearly 600 basis points against the US dollar this month, due primarily to the shrinking interest rate gap.

The iron ore price slumped 5.4 percent, and the Aussie eased against the yen to 78.29. The Australian currency is likely to fall further to 0.7 against the US dollar.

The New Zealand dollar continues to consolidate, and technical chart shows it might slip further to 0.656 against the US dollar.

Meanwhile, the gold price has lost 3.6 percent this month due to a strong US dollar. It is set to post the largest monthly drop since November last year. It has tumbled to US$1,241.55 per ounce, the lowest since April 28.

Nevertheless, holdings of world’s largest gold ETF SPDR Gold Trust continued to rise 0.38 percent to 872.52 metric tons on Monday. The yellow metal is likely to ease further to US$1,235 or US$1,222.

The London silver price has dropped below the trough of US$16.72, and it could face further downside pressure. It may weaken further to US$16.

This article appeared in the Hong Kong Economic Journal on May 25.

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

JZ/DY/CG

Sales director, Emperor Capital Group Limited; HKEJ columnist

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