23-6-2023 (SINGAPORE) The dollar found strength on Friday amid a wave of risk aversion as hawkish comments from central banks worldwide, including the Federal Reserve, fueled concerns that aggressive monetary tightening measures could plunge economies into a deeper downturn.
Despite the Bank of England’s (BoE) unexpected 50-basis-point interest rate hike on Thursday to address stubborn inflation, the pound struggled to maintain its gains, with traders apprehensive about the possibility of a UK recession.
Although higher interest rates typically bolster currencies, the risk of triggering an economic downturn has prompted some investors to seek safe-haven assets such as the U.S. dollar.
The pound slipped 0.07% to $1.2740 after briefly surging to a near one-year high following the BoE’s rate hike, before losing ground again. It was on track for a weekly loss of over 0.5%, breaking a three-week streak of gains.
Nick Bennenbroek, an international economist at Wells Fargo, remarked, “With the Bank of England set to raise rates substantially further, we expect the UK economy to come under renewed pressure by late 2023, and look for growth to either stagnate or even for the economy to contract. Only once there are clearer signs of a growth slowdown and a deceleration of inflation, do we believe those factors will convince the Bank of England to bring its tightening cycle to an end.”
The Turkish lira hit a record low of 25.589 against the U.S. dollar after the Turkish central bank’s 650-basis-point rate hike to 15% on Thursday fell short of expectations.
Meanwhile, the dollar strengthened broadly, hovering near a seven-month high against the yen at 142.90. The Japanese currency faced renewed pressure as the Bank of Japan (BOJ) maintained its ultra-dovish stance in contrast to its hawkish counterparts elsewhere.
Data released on Friday revealed that Japan’s core consumer prices remained above the BOJ’s 2% target for the 14th consecutive month. However, separate data showed a contraction in manufacturing activity in June and a slowdown in service sector growth for the first time in seven months.
The euro slipped 0.04% to $1.0950, while the U.S. dollar rose 0.05% against a basket of six major peers to 102.44.
Federal Reserve Chair Jerome Powell stated on Thursday that the central bank would proceed with interest rate adjustments at a cautious pace, with a significant number of Federal Open Market Committee members anticipating more rate hikes in the future.
Currently, money markets are pricing in a 74% probability of a 25-basis-point rate increase at the Fed’s upcoming policy meeting.
Similarly, the Swiss National Bank and Norway’s central bank indicated that further tightening measures were likely after raising rates by 25 and 50 basis points, respectively, on Thursday.
Tina Teng, a market analyst at CMC Markets, noted, “Most of the Western central banks are now more hawkish than previously projected. Inflation is hot, and interest rates are still rising as well. There’s now a slowdown in economic growth, (which could) probably cause a potential recession as well. So sentiment is actually not great.”
The risk-sensitive Australian dollar declined 0.16% to $0.6746 after sliding nearly 0.6% on Thursday, while the New Zealand dollar dipped 0.05% to $0.6174, following a 0.4% drop in the previous session.
