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Yuan

Dollar rally suppresses yuan and other currencies as odds increase for a March rate rise

Four Fed officials have made hawkish comments, with the focus now on a policy speech by Fed chair Janet Yellen on Friday

PUBLISHED : Thursday, 02 March, 2017, 11:43am
UPDATED : Thursday, 02 March, 2017, 6:45pm

A basket of currencies, including the Chinese yuan, British pound, euro and yen, all weakened against the greenback on Thursday as the odds of an interest rate rise in March jumped to 80 per cent from 40 per cent in past four days.

DXY, the US dollar index that indicates its value against a basket of six rival currencies, extended its strength from Wednesday night to Thursday, at one point reaching 102, the best intraday level since January 10.

The rally came as US Federal Reserve governor Lael Brainard, who has been dovish, turned more optimistic on the US and global economies, and showed her support for a rate rise.

So far this week, four Fed officials have sent hawkish comments to the market. The focus is now on a policy speech by Fed chair Janet Yellen on Friday.

The onshore yuan in Shanghai closed at 6.8820 against the dollar at 4.30pm on Thursday, only 20 points per cent weaker. The offshore yuan in Hong Kong also weakened 66 points or 0.1 per cent to 6.8767 per dollar.

The euro slid 0.1 per cent to US$1.0540, while the pound was flat at around US$1.2291. The Japanese yen depreciated to the two-week low at 114.3 per dollar.

The US dollar jumped as officials from the Federal Reserve recently stood out sending hawkish comments to the market, saying that a rate rise should come more quickly
Eddie Cheung, Standard Chartered Bank

“The US dollar jumped as officials from the Federal Reserve recently stood out sending hawkish comments to the market, saying that a rate rise should come more quickly,” said Eddie Cheung, foreign exchange strategist at Standard Chartered Bank (Hong Kong). “More and more investors feel that officials want a rate rise in March. The probability has risen to 80 per cent.”

The probability was only 40 per cent on Friday last week.

Although US President Donald Trump didn’t provide solid details in his first address to Congress on Tuesday, his policies are generally set to push the US dollar up, said Cheung, who expects the currency to rise 5 per cent in 2017.

Standard Chartered still expects two rate increases this year, the first coming possibly in June, said Cheung.

As other major currencies weakened against the greenback, the yuan was stable against a basket of currencies.

“Market concern on the yuan’s depreciation has turned milder from the beginning of the year after the Chinese authorities launched a series of capital control measures,” Cheung said.

“I don’t think the yuan will drop sharply in the coming two months, especially when the ‘two sessions’ [NPC and CPPCC meetings] kicks off.”

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