Dollar Down, Investors are focused on Interest Rates

On Wednesday morning, the dollar was lower in Asia, but it was still close to the year’s highs against the euro and yen. Investors are now watching to see if the United States Federal Reserve will begin asset tapering sooner than its European and Japanese peers.

The US Dollar Index, which measures the greenback against a basket of other currencies, fell 0.01 percent to 94.070. The main focus, though, is on when the central bank will raise interest rates.

Fed policy challenged in ways not seen since the early Volcker years. Inflation is accelerating in an economy that has been pricing itself off zero nominal rates and extreme negative, accurate rates for the past 18 months. Predictions for even faster hikes elsewhere in the world are rising. However, concerns may lurk ahead if investors begin to believe that more than a few interest rate hikes require to curb rapidly rising prices.

Suppose the predicted resilience of the real economy to rate hikes is accurate and inflation remains persistent. In that case, market projections for the terminal fund’s rate at around 1.75 percent by the end of 2026 appear far too low.

The Bank of England (BOE) will announce its decision on Thursday, with swap prices anticipating a slight interest rate increase. On the other hand, a sinking currency might lead to disappointment or, at the very least, a severe rebuke of market inflation forecasts.

Currencies

The USD/JPY exchange rate fell 0.12 percent to 113.81.

The AUD/USD pair rose 0.06 percent to 0.7432, while the NZD/USD pair rose 0.14 percent to 0.7119.

The USD/CNY pair fell 0.01 percent to 6.3989. Data released earlier in the day revealed that China’s Caixin services purchasing managers index for October was 53.8. The number was slightly higher than the 53.4 reported the previous month. The GBP/USD exchange rate rose 0.11 percent to 1.3630.

In Europe, Lufthansa reported a return to operating profit in the third quarter for the first time since the pandemic began.

Zalando, a German online fashion retailer, announced mixed third-quarter results, with earnings falling. Still, sales increased 23 percent as customers continued to shop online even after stores reopened following coronavirus lockdowns.

Novo Nordisk reported excellent third-quarter earnings in Denmark, boosted by high demand for its new obesity medicine. Still, Vestas Wind Systems reduced its operating margin estimates, citing input cost pressures. However, the revenue of the wind turbine manufacturer exceeded estimates.