Overview: The dollar's impressive recovery from the pre-weekend sell-off spurred by comments from Federal Reserve Chair Powell at Jackson Hole was challenged earlier today on news that President Trump was carrying out his threat to fire Federal Reserve Governor Cook. Cook will reportedly challenge the president's authority. The dispute revolves around whether there is "cause", which is usually understood as job-performance related. Now, as the North American session is about to start, the greenback is narrowly mixed against the G10 currencies, with the euro, yen, and sterling leading the way. The Scandis are underperforming. Emerging market currencies are mixed, with the South Korean won (no tariff relief despite yesterday's meeting in Washington) and the Taiwanese dollar are laggards. The PBOC set the dollar's fix slightly higher today after yesterday's new low for the year.
The US equities retraced some of the pre-weekend's surge, and this has is taking a toll today. Nearly all the large markets in the Asia Pacific region but Taiwan and Shenzhen fell. Europe's Stoxx 600 is off nearly 0.45%, which if sustained would be the largest loss since August 1. US index futures are slightly softer. European bond yields jumped yesterday but have come back 1-3 bp softer. French bonds are lagging behind the other eurozone bonds today amid worries that the government will not survive the confidence vote called for early next month. The 10-year Gilt yield is up nearly four basis points as its plays catch-up after yesterday's bank holiday. The US 2–10-year yield curve is steepening and near 58 bp it is the steepest in four months. Treasury will sell $69 bln of two-year notes today and $85 bln in six-week bills. Gold is posting an outside day. A close above yesterday's high (~$3376) would be seen as constructive. October WTI's four-day rally is being challenged. It reached a little above $65 yesterday and is trading near session lows, around $63.70 in the European turnover. Yesterday's low was closer to $63.50.
USD: After the sharp sell-off that took the Dollar Index to a new low for the month before the weekend, it rebounded more than we expected yesterday. DXY surpassed the (61.8%) of last Friday's decline found near 98.35. Interest rates only recouped 2-3 bp. News that President Trump fired Fed Governor Cook immediately knocked the Dollar Index back to about 98.10. Cook is expected to sue to retain her position, and as this became clear, the Dollar Index recovered to marginally take out yesterday's high near 98.55. Today's data include surveys, house price indices, and July durable goods orders but they do not have the heft to materially impact expectations for the Federal Reserve. Fed officials have downplayed survey data. Richmond Fed President Barkin speaks today and tomorrow on the economy. He does not vote this year but seems like a centrist. Weighed down by a decline in Boeing orders, durable goods orders are expected to have fallen for the second consecutive month and the third decline in four months. Excluding aircraft and defense orders, a small gain is likely after a 0.8% decline in June. Overall, these core orders fell in Q2 for the first time since Q2 24, which capped a four-quarter decline. S&P Corelogic Case-Shiller house price increases have slowed for four consecutive months through May, while its measure of prices from 20 large cities has fallen since March and is expected to have fallen again in June. Lastly, Trump is threatening to impose new tariffs and export restrictions unless other nations drop their digital service taxes, which the US has argued unfairly discriminate against US companies.
EURO: The euro fell to nearly $1.1600 yesterday, a deeper pullback than we expected from the pre-weekend high near $1.1745, where the trendline off the July highs was found. It reached $1.1660 on Trump’s attempt to fire Cook but then returned to the lows. It slipped 1/00 of a cent closer to $1.1600 today but buying emerged in early European turnover and recovered to near the middle of the day's range. The low before Federal Reserve Chair Powell spoke was about $1.1585). Still, we expect the upcoming US employment data (September 5 and benchmark revisions on September 9) to reinforce the conviction that the Federal Reserve will resume its easing cycle. The US two-year premium over Germany is holding near four-month lows around 175 bp.
CNY: After setting the dollar's fix sharply lower yesterday, recording a new low for the year (CNY7.1161), the PBOC lifted the fix today to CNY7.1188. The conventional opinion was that China was going to devalue the yuan in the face of US tariffs. We demurred and expected officials not to be tempted to change their policy of a broadly stable yuan against the dollar. As the fix has steadily fallen, some observers began claiming that Chinese banks were buying dollars on behalf of the central bank. The yuan was not rising fast enough for their druthers. And still the fixing fell. In July, when the dollar rebounded, the yuan outperformed. The greenback has retreated this month, and the yuan has risen further. And when everything is said and done, the yuan has risen by about 2% against the dollar this year. Given the interest rate and inflation differentials it likely to be understood as broadly stable in Beijing. The dollar slipped through yesterday's low against the offshore yuan marginally to near CNH7.1470 (low for the year set last month was near CNH7.1440), and rebounded to around CNH7.1655, where it was capped in European turnover.
JPY: The key to the yen is US interest rates. US rates tumbled ahead of the weekend, encouraged by Fed Chair Powell's comments. US rates rose a couple of basis points yesterday, and this was consistent with the dollar's bounce yesterday, which approached JPY148.00. It held today. A break of it could spur a move back to the high seen before Powell spoke (~JPY148.80). The dollar found support near JPY147 in local trading today and remained above JPY147.50 in the European morning. Bank of Japan Governor Ueda did not address monetary policy directly in his speech at Jackson Hole, but his assessment that the tight labor would likely to continue to exert upward pressure om wages, where growth is spreading from large companies to small and medium sized firms, would seem to support speculation of another hike as soon as October. However, the odds of a move in October have barely changed this month with 13-14 bp of tightening discounted by the swaps market for that meeting. July producer service prices increase slowed to 2.9% in July from 3.2% in June, which was a little softer than expected. They have not risen since March. But the more important inflation data this week is Tokyo's August CPI, which is expected to have moderate for the third consecutive month for both the headline and core rates.
GBP: Sterling rallied from almost $1.3390 to nearly $1.3545 before the weekend. Yesterday's pullback saw sterling return to a little below $1.3450, meeting the (61.8%) retracement of last Friday's rally. The losses were extended to $1.3435 today in Europe today but it has recovered to almost $1.3480. The session high, registered on the initial Cook news, was clear $1.3490. The 20-day moving average is near $1.3425, and sterling has not settled below it since August 7. It is a light week for market-moving UK data. The pendulum of market sentiment appears to have swung as far as it might against another rate cut this year. The odds in the swap market are near 40%, down from a 100% chance that was discounted on the eve of the BOE's meeting earlier this month.
CAD: Yesterday, the greenback recouped almost half of what it lost before the weekend to the Canadian dollar. It made a marginal new high today but has held below the lower end of a band of resistance seen in the CAD1.3870-85, where a break could target the high for the month set before Powell spoke before the weekend (~CAD1.3925). Canada's economic calendar is light until the June and Q2 GDP estimates at the end of the week. At least until then, the Canadian dollar is at the mercy of the greenback. When the US dollar rises as it did yesterday, the Canadian dollar is often among the best performers in the G10. That is what happened July, when the greenback bounced, and the Canadian dollar's 1.8% decline was the least among the major currencies. In the first half of the year, as the US dollar was sold aggressively, the Canadian dollar's 5.7% gain was the least among the G10 currencies.
AUD: Among the G10 currencies, only the Australian and New Zealand dollars managed to extend their pre-weekend gains yesterday. The new highs were marginal. As was the case with the Canadian dollar, the Antipodeans did not give up as much of their gains as the other major currencies. The Australian dollar met the (38.2%) retracement target near $0.6470 and it held today. Minutes from the Reserve Bank of Australia's meeting from earlier this month that resulted in a rate cut provided little fresh information. The central bank is on a gradual easing course, but its forward guidance was limited by its own uncertainty. The futures market has a little less than a 30% chance of a cut for next month, which may be high. The cut is fully discounted for the next meeting in early November, which seems like a more likely timeframe, we think. The New Zealand dollar rose a few hundredths of a cent above the pre-weekend high. It poked slightly above $0.5880 before being sold in the North American session to almost $0.5840, which is the halfway mark of last Friday's rally. It tested the next retracement objective (61.8%) is near $5830 today, which is also about where the 200-day moving average is found. New Zealand Prime Minister Luxon opined that he thought the central bank should have been more aggressive last week and cut 50 bp instead of 25 bp. It was a 4-2 vote, and the two dissents favored 50 bp. The cash rate target is now 3% and the central bank anticipated it to be at 2.50% at the end of the year. The swaps market suspects it may take the RBNZ into early next year to reach 2.50%. There are two meetings left this year, and the market has about 38 bp of easing discounted.
MXN: Despite the much smaller than expected Q2 current account surplus ($206 mln vs. median forecast in Bloomberg's survey for $5.4 bln), the peso managed to marginally extend the pre-weekend gains. The US dollar slipped to almost MXN18.5525, compared with last Friday's low near MXN18.5715. As the dollar strengthened yesterday into the European close, the greenback began its advance to new session highs near MXN18.69 in late dealings and it made a new high today near MXN18.7035. However, the session low, below MXN18.65, was set in European turnover. Initial support may be near MXN18.60. Mexico reports the July trade figures on Wednesday and unemployment on Thursday before the central bank's inflation report on Friday. The dollar extended its pre-weekend losses against the Brazilian real too, but it held above the low for the year set on September 13 near BRL5.38. The greenback settled around 0.25% lower against the real yesterday. Inflation figures for the first half of August will be reported today, and prices may have fallen, which would pull the year-over-year rate below 5% for the first time since February.
Reviewed by Marc Chandler
on
August 26, 2025
Rating:
