Dollar Holds Firm as Fed Takes Steadier Approach Compared to Peers
The dollar remains strong as the Federal Reserve (Fed) shows a steadier hand compared to other central banks. On Friday, the dollar reached an eight-week high above 159 yen and traded at its highest in nearly five weeks against the British pound. This strength comes as the Fed's cautious stance on cutting interest rates contrasts with the more relaxed approaches of other central banks.
Dollar Index Rises
The dollar index, which measures the currency against six others, jumped 0.41% overnight, reversing any losses for the week.
Yen Under Pressure
At the same time, the yen has been struggling. Last week, the Bank of Japan (BOJ) decided to wait until its July meeting to reduce bond buying as part of its stimulus efforts. This decision led traders to sell off the yen, causing it to fall past the 159 yen per dollar level on Friday. Tony Sycamore, a market analyst, mentioned that traders were eager to sell the yen again.
In response to the yen's fall to a 34-year low of 160.245 per dollar on April 29, the BOJ spent around 9.8 trillion yen ($61.64 billion) to stabilize the currency. Consequently, the U.S. Treasury added Japan to a list of countries it is watching for potential currency manipulation.
Japan Ready to Act
Despite these measures, Masato Kanda, Japan's top currency diplomat, emphasized that Tokyo is prepared to take further "resolute" actions against "speculative, excessive volatility". Fiona Cincotta, a market strategist, noted that market jitters might push Japanese authorities to intervene again.
Current Dollar and Yen Standings
The dollar last traded at 158.77 yen, slightly weaker by 0.1%, after earlier reaching as high as 159.12 yen. The U.S. currency also rose 0.1% to 0.8919 francs following a 0.78% increase the previous day. The dollar index was up 0.1% at 105.7, poised to end the week flat after two weeks of gains.
Sterling and Euro
The British pound held steady at $1.266, close to its $1.2655 low from Thursday, a level not seen since May 17. The Bank of England (BoE) kept interest rates unchanged this week, describing the decision as "finely balanced".
UK retail sales saw an unexpected boost in May due to better weather, while business growth slowed to a seven-month low in June due to concerns about the upcoming general election on July 4.
The euro eased 0.1% to $1.0692 after preliminary surveys showed service sector activity in France contracted in June, and the German economy's activity slowed.
Federal Reserve's Steady Hand
At its June meeting, Fed officials kept policy unchanged and reduced their projections for three quarter-point cuts this year to just one. Despite cooling inflation and a relaxed labor market, the resilience of the U.S. economy lets the Fed use higher interest rates to combat inflation effectively.
James Kniveton, a senior corporate FX dealer, pointed out that the Fed's position allows the U.S. to fight inflation more rapidly than other countries. With other major central banks being more dovish, this situation could continue to support the dollar in the short to medium term.
