The U.S. dollar is slightly stronger this morning, holding on to its modest rally from yesterday afternoon.
Overview
Federal Reserve Chairman Jerome Powell indicated yesterday that the central bank is prepared to be more aggressive with interest rate hikes if need be. A 25-basis point hike is already fully priced in but odds of a 50 bp hike crept higher following Powell’s hawkish comments. As a result, Treasury yields popped to their highest level since 2019.Most of the dollar’s modest gains have come against commodity-based currencies, including a 0.4% pop versus Norwegian krone and 0.2% against the Australian dollar. The economic docket remains light today with only the Richmond Fed Manufacturing Index due out at 10 a.m. today. Fundamental data will ramp up during the second part of the week including a slew of data on Thursday and Friday. President Biden will attend a NATO emergency summit in Brussels on Thursday as well.
What to Watch Today…
- Richmond Fed at 10 a.m.
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MXN
The Mexican peso continued its incredible recovery versus the U.S. dollar overnight. The peso has gained for eight straight sessions and is now 5.25% stronger than its weakest level on March 8th. The Mexican peso is now less than 1.0% away from its year-to-date high that was last seen on February 23rd, before the Russian invasion of Ukraine.Markets are fully pricing in a 50 bp rate increase at the conclusion of Banxico’s meeting on Thursday
JPY
The Japanese yen continued its fall overnight and is now at a six-year low against the U.S. dollar. The yen fell 1.1% overnight which would represent the largest one-day drop since November 2020, if the level holds. Analysts point to the growing interest rate differential between the Bank of Japan and the U.S. Fed as the reason for the most recent yen sell-off.
Powell’s hawkish comments contrast with the comments from Bank of Japan Governor Haruhiko Kuroda who has pledged ultra-loose monetary policy. The Fed is expected to raise rates as much as seven times this year compared to zero for the BoJ. If the yen continues to decline, policymakers may be compelled to act and intervene in markets. Until then, USD/JPY continues to be a one-way trade.
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