The dollar experienced a slight decline on Thursday, as investors eagerly awaited key U.S. labor market data following the release of minutes from the Federal Reserve’s June meeting. At the same time, a general risk-off sentiment in the market provided support for the Japanese yen.
The minutes from the Fed’s meeting, which were disclosed on Wednesday, revealed that the majority of policymakers anticipate further tightening of U.S. monetary policy, despite the decision to keep interest rates unchanged last month. This news caused the dollar to strengthen slightly along with Treasury yields. However, stocks experienced a decline as the market started to anticipate the resumption of the Fed’s rate-hike campaign this month, with expectations of consistently high rates in an effort to subdue inflation. As a result, the U.S. dollar index, which had gained 0.2 percent the previous day, slipped 0.3 percent to 103.03.
Niels Christensen, chief analyst at Nordea, commented on the outcome of the Fed’s meeting, stating that there were no major surprises, as the market had already anticipated a rate hike happening later in July. However, he noted that investors may be cautious ahead of the upcoming labor market releases, including jobless claims, the private ADP national employment report, the U.S. Labor Department’s Job Openings and Labor Turnover (JOLT) survey, and Friday’s payrolls report.
Markets are currently pricing in an 85 percent probability of a 25 basis point rate increase by the Fed at its next policy meeting, according to the CME FedWatch tool.
Meanwhile, the yen saw an increase of over 0.5 percent against the dollar, reaching 143.835. This gain was attributed to concerns about the global growth outlook, which stemmed from the aggressive monetary tightening by major central banks. The Japanese currency is typically considered a safe haven asset during times of market uncertainty.
Christopher Wong, a currency strategist at OCBC, stated that the yen’s strength was due to risk-off sentiment caused by fears of additional tightening, which could potentially weigh on growth and risk assets. He further added that concerns about global growth and the persistence of higher interest rates remained, which might dampen risk appetite.
In other news, the pound reached a two-week high against both the euro and the dollar. Financial markets are speculating that the Bank of England will raise rates to 6.5 percent early next year. This expectation pushed the yield on the two-year government bond to its highest level since June 2008. Stephen Gallo, global FX strategist at BMO Capital Markets, described the market’s approach to trading the British pound as “one-dimensional.” Instead of selling the pound in anticipation of an economic slowdown, investors are buying the pound based on interest rate differentials.
The Australian dollar recovered by 0.4 percent to $0.6679, following a decline of more than 0.5 percent in the previous session. The decline was a reaction to a private-sector survey showing that China’s services activity expanded at its slowest pace in five months in June. Sean Callow, senior currency strategist at Westpac, pointed out that the Australian dollar is currently highly sensitive to any news coming out of China. He also mentioned that the market is unsure about the Chinese government’s commitment to stimulating the economy, given the patchy nature of the reopening-from-lockdown rebound in the services sector.
In the offshore market, the Chinese yuan last traded at 7.2471 per dollar, after experiencing a 0.4 percent drop in the previous session. Traders believe that the central bank’s decision to set a stronger-than-expected midpoint fixing for the fourth consecutive day this week is an attempt to prevent the yuan from weakening too rapidly and significantly.
Bitcoin reached a 13-month high of $31,500, as it continued to find support from recent plans by fund managers to launch a U.S.-listed spot bitcoin exchange-traded fund (ETF).
Overall, the market awaits the upcoming labor market data, and market participants remain cautious due to uncertainties surrounding global growth prospects and the potential for continued high interest rates.