Dollar Poised for Fifth Consecutive Week of Advances as China Remains a Key Concern

19 Aug, 2023

Dollar Poised for Fifth Consecutive Week of Advances as China Remains a Key Concern

The dollar experienced stability on Friday, maintaining its current value. However, it was poised to achieve its fifth consecutive week of increases, signifying its most extended period of winning in the past 15 months. This ascent was fueled by a preference for safer assets amid concerns about China's economic stability and expectations of continued high U.S. interest rates.

The People's Bank of China (PBOC) surprised the market by setting a significantly stronger daily fixing for the yuan, causing the currency to recover from its 9-month low reached just the day before.

However, the yuan still weakened against the dollar in offshore trading, reaching 7.3060. This drop followed the PBOC's official mid-point rate of 7.2006, which was notably more robust than Reuters' earlier estimate by over 1,000 pips.

China's economic challenges have deepened, with major property developer China Evergrande seeking protection under Chapter 15 in a U.S. bankruptcy court. There are growing concerns over potential default risks in China's shadow banking sector.

The U.S. dollar index, gauging the currency against six major peers, experienced a minor 0.01% decline to 103.380. It previously hit a two-month high of 103.680 earlier in the same trading session. For the entire week, the index is projected to record a 0.5% gain.

Joe Manimbo, a senior market analyst at Convera, noted, "The dollar's rally persists due to the stronger-than-expected performance of the U.S. economy, causing the market to delay expectations of when the Fed might begin easing."

Recent minutes from the Federal Reserve meeting revealed that most committee members continued to perceive "significant upside risks to inflation." The release of robust economic data, particularly in retail sales, further bolstered the case for tightening monetary policy.

Concerns also emerged among investors that Chinese authorities had not taken sufficient measures to stabilize the economy. The unexpected rate cut by the PBOC earlier in the week contributed to widening the yield gap between China and the U.S., making the yuan even more susceptible to decline.

Joseph Trevisani, senior analyst at FXStreet.com, commented on the situation, stating, "Certain statistics from China are causing apprehension. An overstretched sector like the Chinese property market, particularly in retail and commercial, can significantly weigh down the economy."

The yen's depreciation raised concerns about potential intervention by Japanese authorities. The Japanese yen experienced a 0.38% strengthening against the dollar, reaching 145.29 per dollar. This followed a nine-month low of 146.56 recorded the day before.

Although traditionally a downturn in China triggers a flight to the yen, strengthening the Japanese currency, this pattern was not observed this time, as noted by Trevisani.

Last year, the dollar's rise above 145 prompted Japanese authorities to intervene in the currency markets, marking the first such intervention in a generation.

The Australian dollar, often seen as a proxy for China's economic performance, inched up by 0.04% to $0.640. This minor gain followed a nine-month low of $0.6365 recorded the previous day.

On other fronts, the pound experienced a 0.05% decline to $1.2741, as British retailers reported larger-than-expected sales drops in July. The euro, on the other hand, saw a slight 0.04% increase to $1.08745, rebounding from a six-week low of $1.0856 recorded the day before.

In the meantime, the biggest cryptocurrency globally, bitcoin, encountered a decrease of 2.33%, sliding to $26,020 and hitting a new low for the past two months. This followed a more substantial 7% drop on the previous day. Researchers at Grayscale Investments, a crypto asset management firm, attributed the decline to a wave of risk-off sentiment affecting global markets.