The US dollar index rose to around 104.50 on May 31 and then turned around and fell back. It has been gradually approaching the bottom of this year at 100.50/101.00. During this period, the most noteworthy is the change in the monetary policy of the global central banks. After one or two meetings, the central banks of Australia and Canada have kept interest rates unchanged, and then tightened monetary policies again. The US Federal Reserve pause for the first time after raising interest rates 10 times in a row. 

Previously, the market had always believed that with the peak of inflation, the global interest rate rise cycle should come to an end, and even expected that individual central banks were expected to cut interest rates in the second half of the year. However, the rate of decline in core inflation excluding energy and food has been quite slow although headline inflation has fallen from a high level. Inflation rates in some countries are still high, and even tend to pick up. It can be expected that the monetary policy of global central banks will continue to tighten in the second half of the year. Moreover, the central bank will depend on economic data to determine monetary policy actions due to the need to consider the impact of the economy, which will increase the uncertainty in this regard.

Although the Fed did not raise interest rates at its June meeting, it maintained a relatively hawkish stance. Chairman Powell stated that the reason for the suspension of interest rate hikes is to have more time to understand the policy effect. The expected peak interest rate has not yet appeared, and the dot plot predicts that the interest rate will be raised by 0.5% in the future. Since the fundamentals have not weakened significantly, the banking crisis and the debt ceiling issue have also been resolved. The risk of a recession this year has receded somewhat, and markets have accepted that reducing US interest rate are unlikely this year. 

However, the monetary policies of other central banks have also remained tight due to stubborn inflation. While Australia and Canada have resumed raising interest rates, they also indicated the possibility of further tightening while the European Central Bank’s stance remains hawkish. Inflation picked up in the UK, and the core CPI continued to rise, forcing the Bank of England to raise interest rates by 0.5% at its meeting in June. Although the central bank still expects the CPI to fall sharply this year, strong wage growth in the local area will make it difficult for inflation to be controlled, and the market estimates that interest rates may rise to 6%. Affected by slight changes in monetary policy expectations, the US dollar has been under significant pressure recently. However, the US dollar index should have great support at 100/101 in the case of dominant fundamentals. The yen is dragged down by the central bank's maintenance of loose monetary policy, and the disadvantage of interest rate spreads has widened. The exchange rate will continue to be under pressure. It is not ruled out that it will test the resistance of the US dollar at 145.

Patrick Law

General Manager of Hantec Group