USD was highly volatile last week and the twists and turns in the USD were largely caused by the struggle between economics and politics. USD came under pressure as concerns over the broader shape of policy under President Trump outweighed the expectations of higher U.S. inflation, which led to USD strength at the end of 2016. USD had rallied strongly after Trump’s victory last November on the assumption that he would spur repatriation of capital to the U.S. and will spend aggressively on infrastructure and encourage a rise in inflation. However, the fiscal policy action is yet to be seen. USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 0.66% on a week on week basis and is at a level of 99.86.
British Pound was the only currency that performed worse than the USD last week as almost all the economic data released last week were disappointing with manufacturing, service and construction activity slowing and consumer credit dropping. Pound was also hit after the Bank of England keep rates on hold at 0.25% and raised its forecasts for growth and inflation.
USD started the week on a low note as risk aversion hit the currency market after Trump imposed a travel ban on seven Muslim-majority countries and introduced measures to block refugees from entering the U.S. The travel ban order triggered legal challenges, international criticism, widespread protests and confusion over its implementation at airports. It also added to fears over the potentially destabilizing impact of the new administration’s protectionist policies. USD also came under pressure as weak GDP data released a week prior to last dampened the expectations for faster rate hikes by the Fed this year.
Data released on Monday showed that after a 0.2% increase in November. Personal income rose by 0.3% in the month of December after rising by 0.1% in November.
President Trump on Tuesday criticized Japan and China and called on other countries as well to stop weakening their currencies. He threatened to include currency intervention clauses in bilateral-trade deals and his staff also criticized Germany for the weak Euro.
USD turned higher on Wednesday after Federal Reserve kept interest rates unchanged in its first meeting since President Donald Trump took office and on the back of release of upbeat U.S. economic data. The Fed has presented a relatively upbeat view of the U.S. economy. However, Fed refrained from giving any explicit rate-hike signals or the timing of its next move. Fed in a statement said that job gains remained solid, inflation had increased and economic confidence was rising while some policymakers also said that some market-based measures of inflation were still low.
Institute for Supply Management on Thursday reported that its index of manufacturing activity rose to 56.0 in the month of January from December’s reading of 54.5 against the expectation of a smaller increase to 55.0. Data came shortly after U.S. payroll processing firm ADP reported that non-farm private employment rose by 246,000 in the month of January against the expectation of an increase of 165,000 followed by 153,000 jobs on December.
U.S. Department of Labour on Thursday reported that the number of individuals filing for initial jobless benefits in the week ended 28th January fell by 14,000 to 246,000 from previous week’s total of 260,000 against the expectation of a fall of 9,000 to 250,000.
However, on Friday USD pared its previous day gain after a string of U.S. data painted a mixed picture of the economy. U.S. monthly jobs report showed a below than expected rise in wages last month, which is likely to prompt Fed to be less aggressive in raising interest rates this year.
U.S. Department of Labour reported that the U.S. economy added 227,000 jobs in the month of January against the expectations of 175,000 job additions. The economy added 157,000 jobs in December. However, the report also showed that the U.S. unemployment rate ticked up to 4.8% in the month of January from 4.7% in December against the expectation of unchanged reading. Report also showed that U.S. average hourly earnings rose 0.1% in the month of January against the expectations for an increase of 0.3%.
The Institute of Supply Management reported that its non-manufacturing purchasing managers’ index ticked down to 56.5 in the month of January from 56.6 in December against the expectation for the index to rise to 57.0.
U.S. factory orders increased by 1.3% in the month of December against the expectation for a 1.0% rise.
On Friday President Trump signed executive actions that sets the framework for scaling back Dodd-Frank financial regulations, which is positive for the USD as equity markets stand to gain.
Euro appreciated by 0.79% against USD last week. The gain came after President Donald Trump’s top trade adviser accused Germany of exploiting a weak Euro. Peter Navarro, the head of Trump’s new National Trade Council, said that Germany is using a “grossly undervalued” Euro to exploit the U.S. and its trading partners. However, German Chancellor Angela Merkel rejected the remarks.
Japanese Yen showed little reaction to the Bank of Japan’s decision to keep monetary policy on hold. BoJ raised its growth forecast to 1.4% for the current fiscal year against the previous projection of 1.0%. However, on Friday the movement seen in Yen was sharp after BoJ bought fewer bonds than expected, which drove the Yen higher but then BOJ sent the Yen tumbling on plans to buy an unlimited amount of 5-10 year JGBs to “hit CPI target as soon as possible.
Indian Rupee appreciated by 1.07% last week against the USD after Union Budget 2017-18 was presented to the parliament on the 1st of February. The budget saw the government pegging fiscal deficit at 3.2% of GDP, lower than market expectations of 3.3% to 3.5%. Indian Rupee is on a strong footing and is expected to gain in coming weeks as Fed remains cautious about hiking interest rates at a time when Trump’s protectionist policy has brought lot of uncertainty in global financial market.
Asian currencies were broadly higher last week against the USD. Australian Dollar appreciated by 1.71%, New Zealand Dollar appreciated by 0.77%, Japanese Yen appreciated by 2.21% against the USD and by 1.39% against the Euro. South Korean Won appreciated by 2.04%, Philippines Peso appreciated by 0.07%, Indonesian Rupiah appreciated by 0.12%, Indian Rupee appreciated by 1.07% against the USD and by 0.66% against the Euro, Chinese Yuan appreciated by 0.24%, Malaysian Ringgit appreciated by 0.05% and Thai Baht appreciated by 0.72%.