US dollar starts week under pressure

Published: 12 September 2023

The dollar's record hot streak came under threat yesterday as Asia's biggest central banks took aim in different ways at the recent rally in the greenback.

The People's Bank of China gave a strong warning to speculators to steer clear of destabilising the yuan, while the head of the Bank of Japan took a more subtle approach in hinting at the possibility of an eventual policy shift, in an interview which sent the yen soaring. The Bloomberg Dollar Spot Index fell as much as 0,6 percent, the most since August.

"Joint intervention is needed from Asian central banks to cap US dollar strength," said Ju Wang, head of Greater China FX & rates strategy at BNP Paribas. "They are stepping up efforts."

Bloomberg's dollar gauge had just come off its eight straight weekly gain, its longest winning streak since at least 2005. The index had climbed some 5 percent from a mid-July low as better than expected US economic data prompted bets the Federal Reserve will keep rates higher for longer.

The two big Asian currencies had come under particular pressure given the yawning policy gaps between China and Japan, both of which continue to ease, and the US which is aggressively hiking interest rates. The yen had slumped some 7 percent versus the greenback since mid-July, while the onshore yuan had tumbled to a 16-year low against the greenback.

Yesterday, China escalated its defense of the yuan by delivering its strong verbal warning just hours after forceful guidance with its daily reference rate. In Japan, traders reacted to comments from BOJ Governor Kazuo Ueda on the possibility of ending the developed world's last key negative interest-rate regime, a shift which would revive interest in the beleaguered yen.

Investors are also looking ahead to this week's key US inflation data for the next clues as to the Fed's policy path as well as mulling a rate decision from the European Central Bank.

"Higher energy prices will prevent further declines in US inflation and provide the dollar with some support," said David Forrester, a strategist at Credit Agricole CIB in Singapore.

- Bloomberg