We caution against reading too much into recent daily exchange rate movements. Most currencies remain confined to their trading ranges of the past month, with only tentative signs of a breakout. The DXY Index rose 0.4% overnight to a new year’s high of 102.6, driven largely by a 0.4% decline in EUR/USD to 1.1155, also a new year’s low. However, a sustained USD rally would require the DXY to hold above its previous high of 102.54, and EUR/USD to remain below its October 5 low of 1.1160.
Higher US inflation may support the USD, but the implications are not one-sided. Tomorrow’s CPI report is expected to reinforce expectations of further Fed tightening. However, several Fed officials have pushed back against a back-to-back hike at the October 28 FOMC meeting, potentially limiting the USD’s upside. Stubborn inflation also carries political costs for Republicans by reinforcing voters’ frustration with the cost of loving ahead of the November 3 US midterm elections. Rising expectations that Democrats could capture both the House and Senate could add to the USD’s political risk premium.
However, US political vulnerabilities do not automatically translate into EUR strength. Europe faces its own political and fiscal uncertainties, particularly in France and Germany. Consequently, the DXY and EUR are becoming less about relative Fed-ECB tightening expectations and more about political stability, fiscal credibility, and investor confidence on both sides of the Atlantic. The question is increasingly not about which currency offers stronger interest rate support, but which has more compelling reasons to weaken.
Elsewhere in the DXY basket, GBP/USD fell 0.2% to 1.3208, approaching the lower end of its two-week 1.3180-1.3310 range. USD/CHF rose 0.55% to 0.8347, moving into the upper half of October’s range of 0.8228-0.8383. USD/CAD remained confined to its 1.42-1.43 range this month. USD/JPY climbed 0.2% to a new October high of 158.6 but faces resistance at 159 and 160.4, its previous highs on September 24 and September 2.
Asian currencies also struggled to break out of their recent ranges. USD/SGD continues to consolidate within the 1.2750-1.2830 range established since the last week of September, underscoring the SGD’s relative stability as a price-taker exchange rate. USD/VND has returned above its main support level of 25,900 after briefly touching a new year’s low of 25,818 last Friday. Similarly, USD/KRW’s 0.4% decline to a new year’s low of 1334.43 does not imply the start of a new downtrend below its September 9 low of 1334.50. Despite the Reserve Bank of India’s hawkish rate hike on October 7, persistent depreciation pressures on the INR have kept intervention necessary to contain USD/INR within its five-month 94-97 trading range. Bank Indonesia also intervened earlier in late September to stabilise USD/IDR, keeping it below the 18,000 threshold, amid rising global bond yields and oil prices.
Quote of the Day
“Monetary discipline forces fiscal discipline on the politicians as well.”
Robert Mundell
Today in history
On October 13, 1999, Robert A. Mundell was awarded the Nobel Memorial Prize in Economics for his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas.
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