Dollar sinks vs yen, hovers near 2-1/2-year low to sterling after Fed's dovish shift

British Pound

Reuters: Sterling climbed to a more than two-year high on the dollar on Friday, on recent signs of strength in the UK economy and dovish comments from Federal Reserve Chair Jerome Powell that sent the dollar sliding against several global currencies. Britain's pound jumped 0.7% to $1.3185, touching its highest since late March 2022. It surpassed a previous 13-month high of $1.3144. The dollar index, that tracks the greenback's performance against six major currencies, dropped 0.5% after Powell said "the time has come" to adjust policy and promised to do all he can to avoid further weakening of labour markets.

"I think initially the market is really going to be dovish, taking interest rates down and taking the dollar down," said Marc Chandler, chief market strategist at Bannockburn Global Forex. Following Powell's remarks, traders priced in a bigger chance of a super-sized 50 basis point rate cut at the U.S. central bank's September meeting. Sterling has been among the top performing major currencies this year, picking up steam in the last two months after a slew of stronger-than-expected economic data suggested the BoE need not be in a rush to cut interest rates.

Latest numbers showed British consumer confidence held at an almost three-year high in August. A survey on Thursday showed UK business activity accelerated in August and cost pressures eased to their weakest in over three years. The latest milestone for sterling marks a turnaround since late 2022 when worries about soaring inflation and sluggish growth were compounded by then Prime Minister Liz Truss' economic plan that put Britain's fiscal health at risk. The currency touched a record low of $1.0327 in September 2022, and has recovered about 27% since then. However, it remains down about 38% from a record high touched in 2007 before the global financial crisis.

After Powell's remarks, the focus for the pound shifts to Bank of England Governor Andrew Bailey, who is set to speak at the symposium at 1900 GMT. "Bailey does not have to deal with aggressively dovish pricing -39bp by year-end, but the UK still needs to gain much more confidence on the inflation front," ING FX strategist Francesco Pesole said. The BoE cut its Bank Rate to 5.00% from a 16-year high of 5.25% in early August, and market pricing shows traders see at least one more rate cut this year. The Fed, on the other hand, is seen cutting rates by at least 25 bps in each of the three meetings that is left this year. Euro/sterling fell to a three-week low, to trade down 0.3% at 84.66 pence per euro.

US Dollar

Reuters: The yen rose to a three-week high against the dollar on Monday as Federal Reserve Chair Jerome Powell's emphatic dovish shift contrasted sharply with Bank of Japan chief Kazuo Ueda's steadfastly hawkish tone. The U.S. currency hovered near its lowest in 13 months against the euro. It also sagged closer to levels last seen in March 2022 versus sterling, with Bank of England head Andrew Bailey's comments that it was "too early to declare victory" over inflation signalling a less aggressive stance on interest rate cuts than the Fed.

The dollar sank as much 0.59% to 143.56 yen for the first time since Aug. 5 in the early hours of Monday before last trading down 0.25%. Sterling was steady at $1.3215 after jumping as high as $1.32295 on Friday for the first time in 17 months. Although Fed officials had sounded increasingly dovish in the lead up to the Fed's annual Jackson Hole symposium, Powell on Friday "used stronger language" than his peers when delivering his keynote speech, said Tapas Strickland, head of market economics at National Australia Bank.

"Importantly, there was a notable absence of caveats such as 'gradual/gradualism'," which "is likely what excited markets," Strickland said. Over in Asia, BOJ's Ueda, who spoke in parliamentary testimony earlier on Friday, "stuck to the script of the BOJ needing to adjust the degree of easing – central bank-speak for a further increase in the policy rate from a low level – and he played down the significance of the July rate hike on market turmoil," Strickland said. Many market participants anticipated Ueda might strike a less hawkish note in the special session of parliament, which was called amid criticism the surprise hike last month helped spark a rapid unwind of bearish yen bets and aggressive sell-off of Japanese stocks.

The dollar index - which measures the currency against a basket of six major peers, including the euro, sterling and yen - languished at 100.64, just off the 13-month low of 100.60 reached at the end of last week. The euro was little changed at $1.1190, not far from its Friday high of $1.1201, a level last seen in July of last year. That's despite sources telling Reuters that European Central Bank policy makers are lining up behind another rate cut on Sept. 12. Traders unanimously expect the Fed to kick off its loosening campaign on Sept. 18, but see 36.5% odds of a super-sized 50-basis point reduction, according to the CME Group's FedWatch Tool.

That's up from 25% odds a week earlier. Elsewhere, the Australian dollar eased 0.1% to $0.6790, but still remained close to Friday's peak of $0.67985, the highest level since July 11. The Chinese yuan ticked up slightly to 7.1130 per dollar in offshore trading, the strongest level since Aug. 5. Leading cryptocurrency bitcoin added 0.9% to $64,271.60.

South African Rand

Reuters: The South African rand slipped against a stronger dollar on Thursday as investors awaited Federal Reserve Chair Jerome Powell's speech for hints on the future interest rate path of the world's biggest economy. At 1530 GMT, the rand traded at 18.01 against the dollar, about 1% weaker than its previous close. The dollar index was last trading up about 0.37% against a basket of currencies. The Jackson Hole Economic Symposium of global central bankers in Wyoming starts on Thursday, with Powell set to speak on Friday.

"The all-important speech will give an important idea of how the interest rate cycle in the U.S. will play out and could further impact the local currency," said Wichard Cilliers, head of market risk at TreasuryONE. Fed minutes released on Thursday revealed the U.S. was on track for an interest rate cut in September after a "vast majority" of officials said such an action was likely. Like other risk-sensitive currencies, the rand often takes cues from global drivers like U.S. monetary policy in the absence of major local factors.

On the stock market, after hitting record highs earlier in the day, the Top-40 index closed down 0.63%, while the broader all-share ended 0.48% lower. South Africa's benchmark 2030 government bond was weaker, with the yield up 9 basis points at 9.12%.

Global Markets

Reuters: Asian shares crept cautiously higher on Monday, while the dollar and bond yields were on the wane ahead of inflation data that investors hope will pave the way for rate cuts in the United States and Europe. Oil prices climbed 0.8% after Israel and Hezabollah traded rocket salvos and air strikes on Sunday, stirring worries about possible supply disruptions if the conflict escalated. Brent rose 55 cents to $79.57 a barrel, while U.S. crude added 56 cents to $75.39 per barrel. Investors are also anxiously awaiting earnings from AI darling Nvidia on Wednesday to see if it can match the market's uber-high expectations.

The stock is up some 150% year-to-date, accounting for around a quarter of the S&P 500's 17% year-to-date gain. "Nvidia will beat consensus expectations, they always do, but investors are so ingrained in seeing revenue come in $2 billion plus above the analysts' consensus or we could easily see a sell the news event," said Chris Weston, head of research at broker Pepperstone. That means Nvidia would have to report sales of $30 billion or more and guidance for Q3 of $33 billion or above, he added.

On Monday, S&P 500 futures and Nasdaq futures were steady after starting a shade lower. EUROSTOXX 50 futures dipped 0.2%, while FTSE futures were closed for a holiday. MSCI's broadest index of Asia-Pacific shares outside Japan added 0.8%, after rising 1.1% last week, while South Korea was barely changed. Chinese blue chips were also near flat. Japan's Nikkei lost 1.0% as a stronger yen pressured exporter stocks. The yen has jumped on a broadly weaker dollar after Federal Reserve Chair Jerome Powell said the time had come to start easing policy and emphasised that the central bank did not want to see further weakening in the labour market.

"Importantly there was a notable absence of caveats such as 'gradual/gradualism' as used by other Fed officials," noted Tapas Strickland, head of market economics at NAB. "The jobs report on September 6 is clearly important as Powell is willing to cut rates to ward off downside risks to employment and to maintain a strong labour market," he added. "In summary, Powell has increased the chances of a soft landing." Figures on U.S personal consumption and core inflation are due on Friday, along with a flash reading on European Union inflation. Analysts generally assume the data will be benign enough to allow for rate cuts in September.

Fed fund futures are fully priced for a quarter-point cut at the Sept. 18 meeting, and imply a 38% chance of an outsized move of 50 basis points. The market also has 103 basis points of easing priced in for this year and another 122 basis points in 2025. "We continue to expect the FOMC to deliver an initial string of three consecutive 25bp cuts at the September, November, and December meetings," said analysts at Goldman Sachs. "Our forecast rests on our assumption that the August employment report will be stronger than the July report, but we continue to think that if instead the August report is weaker than we expect, then a 50bp cut would be likely."

Markets are also fully priced for a quarter-point cut from the European Central Bank next month, and a total 163 basis points of easing by the end of 2025. Yields on two-year Treasuries stood at 3.91%, having fallen almost 10 basis points on Friday, while 10-year yields held at 3.79%. The dollar slipped a further 0.5% to 143.64 yen, having fallen 1.3% on Friday. The euro was up at $1.1191 and just off a 13-month top, while the Swiss franc held firm at 0.8461 per dollar. A softer dollar combined with lower bond yields to underpin gold at $2,514 an ounce, and near an all-time peak of $2,531.60.

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