USD rose sharply against major world currencies last week, amid sell-off in the global equity markets. The sharp rise in volatility and deterioration in risk appetite have directed the USD movement last week. Whenever there’s a global equity market sell-off, the USD and Japanese Yen are the best performers and this is what exactly happened last week. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 1.40% on a week on week basis and is at a level of 90.44. Japanese yen appreciated by 1.26% against USD and by 2.96% against the euro. The British pound was hit hardest followed by the euro.
The main reason for the sell-off in stocks is the sharp rise in Treasury yields, which was triggered after stronger than expected U.S. jobs report that bolstered expectations for a faster pace of rate hikes by the Federal Reserve this year. The strong wage growth data fuelled inflation expectations and underlined the case for the Fed to raise interest rates at a faster pace this year. The 10-year treasury yield breached 2.8% levels last week.
USD received additional support on Wednesday after U.S. congressional leaders reached a two-year budget deal to raise government spending by almost USD 300 billion. However, on Thursday USD weakened as midnight deadline to pass the budget deal was missed due to a prolonged speech by Senator Rand Paul, who objected to the USD 300 billion in deficit spending in the bill saying that it would “loot the Treasury.” The Senate finally passed a short-term budget bill on Friday, ending the brief government shutdown initiated overnight. Senators voted 71-28 to approve the deal, which will now be submitted to the House of Representatives.
St. Louis Federal Reserve president James Bullard attempted to curb expectations that rising wage growth would spur faster inflation, warning that nominal wages were not a good predictor of inflation. He also said that that he favours low rates for an extended period and expected that the Fed’s dot plot may be less useful.
U.S. Labour Department’s latest Job Openings and Labour Turnover Survey (JOLTs) report, a measure of labour demand, showed job openings in December fell to about 5.81m against the expectations of 5.96m.
The trade deficit widened to USD 53.1 billion in the month of December, up from USD 2.7 billion from November, against the expectation of USD 52.10 billion.
U.S. Department of Labour on Thursday reported that the number of individuals filing for initial jobless benefits in the week ended 3rd February fell by 9,000 to 221,000 against the expectations of a rise of 6,000 to 236,000.
British pound depreciated by 2.06% against USD last week. British pound came under heavy selling pressure after a planned meeting to discuss the UK’s future relations with the EU was cancelled. Negative sentiment on pound intensified further as Michael Barnier appeared to take a tough stance on Brexit negotiations, demanding that the UK apply new EU Rules in a possible transition period.
The BoE left rates unchanged at 0.5% at its meeting on Thursday in a unanimous decision. The BoE has also warned that interest rates could rise faster than investors are currently anticipating. The BoE now sees growth of 1.8% this year up from 1.6% previously and growth of 1.8% in 2019, up from 1.7%.
Asian currencies were largely down last week against the USD. Australian Dollar depreciated by 1.49%. New Zealand Dollar depreciated by 0.62%. Japanese Yen appreciated by 1.26% against the USD and appreciated by 2.96% against the Euro. South Korean Won depreciated by 1.11%, Philippines Peso appreciated by 0.31%, Indonesian Rupiah depreciated by 1.29%, Indian Rupee depreciated by 0.52% against the USD and appreciated by 1.50% against the Euro, Chinese Yuan depreciated by 0.04%, Malaysian Ringgit depreciated by 1.37% and Thai Baht depreciated by 0.79%.