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The US dollar has been in relative free fall since late Friday after it emerged that the New York Federal Reserve was holding a rare “rate check” with currency traders on the dollar/Japanese yen exchange rate. luck understand that the check is made per request from the US Treasury.
The purpose of the move means that the US government may consider coordinated action with the Bank of Japan to support the latter’s currency.
As a result, traders began to sell the dollar, which has now decreased by more than 2.26% in the last five days against a basic basket of international currencies-an unusually steep decline given the large scale of the dollar in the global economy. Just last day it lost 0.46%. The yen rose more than 3% against the dollar over the same time period. (ING has a detailed blog post on the rate review controversy HERE.)
The Nikkei 225 stock index fell 1.79% this morning. That’s a sign traders fear that equities exposed to Japan’s export market will be hurt by the yen’s rise.
The price of gold soared to a new record, over $5,000 per troy ounce. That adds to the anti-dollar narrative on Wall Street. The dollar used to be a safe-haven asset, but as the US became more politically volatile, investors go elsewhere.
“It used to be the case that any burst of geopolitical tension would tend to rally the world around the US dollar. That’s because the US—despite its role as guarantor of the old order and its obligation to engage in hostilities—is still seen as the safest and most accessible redoubt or refuge for global ‘capital of flight,’ and because it has an unparalleled history of its own without chaos (relative chaos) or enjoined,” according to Macquarie’s Thierry Wizman.
“But what is happening today is different. Instead of flocking to the USD, traders are flocking to gold and its neighbors on the periodic table (for example, silver, platinum) and defense stocks, and the USD is showing little of its former arrogance. We think that this is because the implicit arrangements that have prevailed since WW2 have been found by clients, despite the slow narrative,” he told clients in a a short letter. luck.
At UBS, Paul Donovan is equally downbeat. “The deterioration in the international situation of the US and recent domestic events may undermine some of the perceived supports of the dollar’s reserve status,” he told clients today.
Awaiting the Fed
In the US, everything is on hold for the Fed’s interest rate decision on Wednesday. S&P 500 futures fell 0.12% this morning after closing flat at 6,915 on Friday.
Almost no one thinks the Fed will move the base rate level (it is currently at the 3.5%-plus level). Speculators on the CME FedWatch Fed Funds futures index think there is a 97% chance the rate will remain on hold.
That could set up some fireworks later in the week, as President Trump has reportedly called for lower prices. Ironically, his public attack on the issue has made the Fed less likely to cut rates, as the Federal Open Market Committee is now under pressure to demonstrate political independence.
The drama of the Fed’s decision, therefore, will center on what words Chairman Jerome Powell used in his Q&A with the press.
“While the FOMC is expected to maintain its policy rate between a range of 3.5% and 3.75%, the real action will take place at the news conference after Wednesday, when Federal Reserve Chair Jerome Powell will face reporters,” according to RSM chief economist Joe Brusuelas. “We expect Powell to use his platform to deliver a smart but quick defense of central bank independence. The discussion about central bank independence will suck all the air out of the room and will likely see a real-time response from the White House.”
Here’s a snapshot of the markets ahead of the opening bell in New York this morning:
- S&P 500 futures fell 0.12% this morning. The last session closed flat at 6,915.
- STOXX Europe 600 flat in early trading.
- The UK’s FTSE 100 flat in early trading.
- Nikkei 225 in Japan fell to 1.79%.
- CSI 300 in China is flat.
- The South Korean KOSPI fell to 0.81%.
- NIFTY 50 in India fell to 0.95%.
- Bitcoin was flat at $87.8K.
