Friday turned out to be a great day for the USD as it moved higher against all major currencies following Fed Chair Janet Yellen’s speech at Jackson Hole. However, it wasn’t her words that sent the USD soaring. USD Index (DXY), which tracks the movement of the USD against six major currencies, was up by 1.12% week on week closing at levels of 95.57.
Janet Yellen said in her speech that the rate-hike case strengthened in the recent months, but it was Fed Vice Chair Fischer’s comments that really sparked the rally in the USD. He was explicit in saying that Yellen’s comments were consistent with a possible September rate hike and that two rate hikes this year is possible. Throughout the past week, markets heard consistent hawkish comments from U.S. policymakers, who all seem to agree that the country is close to full employment and that inflation is on the rise. While some members like Fed President Powell still believe the central bank can afford to be patient, if the upcoming August nonfarm payrolls report is strong, the chance for a September hike will rise significantly.
Indian rupee will witness some sort of volatility in coming weeks on Fed rate hike expectations but that is expected to last for a short term as economic fundamentals are robust for an economy like India which safeguards the internal value of INR. Dr. Urjit Patel appointment as RBI governor is INR positive as he is expected to follow Dr. Rajan’s policy of staying highly cautious on rates given that inflation is still a threat to the economy .
USD remained flat at the start of the week but was broadly supported on the revived expectation of Fed rate hike this year after San Francisco Fed President John Williams joined the club along with New York Fed President William Dudley and Atlanta Fed President Dennis Lockhart, saying that if the U.S. central bank waited too long to raise rates, it could be costly for the economy and that a possible rate hike in September should be in play.
Data released by U.S. Commerce Department on Tuesday showed that new home sales jumped by 12.4% to 654,000 units in the month of July against the expectations for a 2.0% decline followed by 1.7% gain in June.
U.S. existing home sales fell more than expected in July, dampening optimism over the health of the housing market. Data showed that U.S. existing home sales decline by 3.2% in the month of July to 5.39 million units from the 5.57 million units in June and against the expectation for a decline of 0.4% to 5.51 million units.
U.S Commerce Department on Friday reported that U.S. economic growth in the three months to June was revised to an annual rate of 1.1%, from an earlier estimate of 1.2%.
U.S. Department of Labour on Thursday reported that number of individuals filing for initial jobless benefits in the week ended 20th Aug fell to a five-week low level, remaining in territory associated with a healthy labour market. Data showed that initial jobless claim fell by 1,000 to 261,000 from the previous week’s total of 262,000 against the expectation of a rise of 3,000 to 265,000.
Euro ended the week lower against the USD after touching Eur 1.1367 levels on 18th August. Euro depreciated by 1.12% against USD last week. The recovery in the USD played a major role in the currency’s reversal, but softer Eurozone data also dragged the currency pair lower. Manufacturing and service-sector activity in Germany slowed in the month of August. Slower growth in the Eurozone’s largest economy raise red flags for anyone long the currency. German business confidence also declined with the IFO business climate index falling to its lowest level in 6 months.
Asian currencies were largely down last week on broad USD strength. Australian Dollar depreciated by 0.83%, New Zealand Dollar depreciated by 0.5%, Japanese Yen depreciated by 1.59% against the USD and by 0.42% against the Euro. South Korean Won appreciated by 0.33%, Philippines Peso appreciated by 0.13%, Indonesian Rupiah depreciated by 0.37%, Indian Rupee remained flat against the USD while strengthening by 0.36% against the Euro, Chinese Yuan depreciated by 0.24%, Malaysian Ringgit depreciated by 0.03% and Thai Baht depreciated by 0.07%.