Dollar strengthens after big shift in global rate outlook

NEW YORK/LONDON (Reuters) – The dollar was poised for a second consecutive week of gains on Friday, as a minor rate hike in Japan provided a brief respite for the yen and an unexpected cut in Switzerland underscored the disparity in interest rate policies between the Federal Reserve and other central banks.

This week marked a notable shift in global monetary policy, with the Swiss National Bank (SNB) and central banks in emerging markets either cutting rates or signaling their intention to do so. The European Central Bank is likely to follow suit, with June being the anticipated timing for its move.

The dollar strengthened against all G-10 currencies except the yen, buoyed by the robust U.S. economy and higher interest rates that sustained the carry trade. However, the Swiss rate cut, the first by a major European central bank, marked a significant turning point.

Shaun Osborne, Chief FX Strategist at Scotiabank in Toronto, commented on the surprise SNB cut, stating, “People have been speculating on the implications for other European central banks.”

The Federal Reserve maintained its overnight rate between 5.25% to 5.5% and reaffirmed projections for three cuts by the end of the year. Nevertheless, it emphasized that it would not cut rates until it was confident that inflation was consistently declining towards its 2% target.

Market expectations suggest approximately 84 basis points of cuts for this year, significantly lower than the 160 projected at the beginning of the year but higher than earlier in the week as rate cut expectations gained momentum.
Sterling declined by 0.5%, hitting a one-month low of 1.258, following a 1% drop on Thursday when the Bank of England left rates unchanged. The BoE signaled a more dovish stance as two hawkish committee members withdrew their prior call for a rate hike.

Marvin Loh, Senior Global Macro Strategist at State Street (NYSE:STT) in Boston, noted, “Developments from the SNB and the BoE, hinting at earlier-than-expected rate cuts, are painting the dollar in a favorable light.”

The Swiss franc, the best-performing G10 currency in 2023, has depreciated by about 1.7% against the dollar this week and approximately 6.8% year-to-date.

The dollar index, measuring the U.S. currency against six major counterparts, increased by 0.45%, while the dollar weakened by 0.12% against the Japanese yen to 151.44 per dollar.

The dollar has appreciated by around 1.5% against the yen this week, after nearing levels that triggered Japanese intervention in 2022.

Euro/yen reached its highest level since 2008 at 165.37 this week, and the Aussie surpassed 100 yen for the first time since 2014.

With the dollar gaining strength, the euro hit a three-week low, last trading down 0.5% at $1.0806.

The Bank of Japan announced a historic shift away from negative short-term rates and longer-run yield caps, but it was widely anticipated, causing the yen to weaken upon the news.

Expectations for policy easing in China have also weighed on its currency, prompting a sharp drop in the onshore session and leading state banks to intervene.

The yuan was last at 7.229 per dollar, while in offshore trading, the dollar recorded its largest one-day increase against the yuan in a year, up 0.77% to 7.2769.

Bitcoin was on track for its biggest weekly decline since last August, falling by approximately 6.7%, as crypto markets retreated from a strong rally earlier in the week. However, trading will continue until Sunday.

It was last down by 2.74% at $63,674.36, having fallen by around 13% since reaching a record high close to $74,000 last week.