The dollar stabilized near its highest level in two weeks, on Monday, as markets increased their bets on raising interest rates after hawkish statements by Federal Reserve Chairman Kevin Warsh, while the yen fell again to exceed the level of 160 yen to the dollar, which is closely watched by the markets.
Warsh said on Friday that the central bank “will have work to do” if policymakers do not gain the necessary confidence that inflation is heading towards the 2 percent level, in his clearest indication yet that further tightening of monetary policy may be necessary to curb price pressures.
These statements strengthened the markets' bets on raising interest rates in September, as the markets raised the implied probability of an interest rate increase next month to 57 percent, while the yield on two-year US Treasury bonds, the most sensitive to interest rate movements, rose to its highest level in more than a month at 4.33 percent.
Sim Moo Siong, a foreign exchange strategist at OCBC, said that Warsh's defense of the inflation target removed a "major obstacle" against the US dollar and returned the focus to economic fundamentals, adding that this helped restore the credibility of the Federal Reserve and eased concerns about the decline in the value of the currency.
Investors are now focusing on the expected US economic data, especially the non-farm payrolls report scheduled to be released on Friday, and consumer inflation data scheduled to be released next week, as the data may affect market expectations before the Federal Reserve meeting in September.
The euro rose 0.1 percent to $1.1591, while the British pound was little changed at $1.3539. The two currencies are still on track to record gains for the second month in a row.
The dollar index, which measures the performance of the US currency against a basket of six major currencies, fell slightly to 99.6 points, after rising 0.6 percent on Friday to its strongest level since August 17.
However, the index is still on track to record a decline for the second month in a row, after the US Treasury’s plans to buy back bonds, announced earlier this month, revived investors’ bets on a decline in the value of the dollar.
Demand for the dollar also received support from the rise in oil prices on Monday, as Brent crude rose about 2 percent after US forces targeted the Iranian island of Lark on Sunday, according to an American official, in the first known US strikes against Iran since late July.
Yen weakness and G20 meeting in the spotlight
All eyes are on the meeting of finance ministers and central bank governors of the G20 countries, which the United States is hosting on Monday and Tuesday. Markets will be watching for any signs of coordinated efforts to cut ties with Iran, along with measures aimed at allaying concerns about rising US debt and bond yields.
The continued weakness of the yen also remains in the spotlight, as the renewed strength of the dollar has increased pressure on the Japanese currency, after it lost a large part of the gains it achieved following the intervention of the authorities in July.
The yen fell slightly to 160.01 to the dollar, after falling below the level of 160 yen to the dollar on Friday, a level that is widely seen as increasing the risks of official intervention, and bringing to the fore the possibility of Tokyo and Washington intervening again to support the Japanese currency.
US Treasury Secretary Scott Besent said on Sunday that the yen's recent moves were "largely contained," adding that he expected Bank of Japan Governor Kazuo Ueda to "do the right thing" regarding monetary policy.
Carlos Casanova, chief economist for the Asia region at UPP, said that interventions in the currency market have historically only succeeded when economic fundamentals moved in the same direction.
He added that the yen is still under pressure due to the continued widening of the interest rate gap, negative real interest rates, and the Bank of Japan's cautious pace in tightening its monetary policy.
In other currency markets, there was little change in the New Zealand dollar at $0.5916, while the Australian dollar rose 0.1 percent to $0.7163.
South Korean stocks fell on Monday, tracking losses in regional markets, after hawkish comments by Federal Reserve Chairman Kevin Warsh raised expectations that the central bank may raise interest rates next month.
The value of the Korean won strengthened, while benchmark bond yields rose. The main KOSPI index fell 167.29 points, or 2.46 percent, to 6,621.59 points by 01:04 GMT.
Among the stocks with the largest weight in the index, shares of chip manufacturer Samsung Electronics fell by 2.72 percent, while shares of its competitor, SK Hynix, fell by 3.27 percent. The shares of battery maker LG Energy Solutions also fell 0.54 percent.
Hyundai Motor shares fell 0.50 percent, while sister car company Kia shares rose 0.31 percent. The shares of the steel maker “Posco Holdings” fell 0.74 percent, while the shares of the pharmaceutical maker “Samsung Biologics” fell 0.81 percent.
Warsh said on Friday that the US central bank “will have work to do” if policymakers do not gain the necessary confidence that inflation is heading towards the 2 percent level, in statements in which he came closer than ever to acknowledging that raising interest rates may be necessary to contain price pressures.
Of the 908 shares traded, 133 shares rose, while 746 shares declined. Foreign investors recorded net stock sales of 347.2 billion won.
The won price was recorded at 1,377.3 to the dollar on the local settlement platform, up 0.16 percent from its previous close of 1,379.5 won to the dollar. In external trading, the won was traded at 1,376.6 to the dollar, without significant change during the day, while the price of a one-month won contract in the non-deliverable futures market reached 1,376.1 to the dollar.
The KOSPI index has risen 57.13 percent since the beginning of the year, while the won has strengthened its value by 4.5 percent against the dollar during the same period.
In cash and debt markets, three-year Korean Treasury bond futures for September delivery fell 0.09 points to 103.25 points.
The yield on the most widely traded three-year Korean bonds rose 3.7 basis points to 3.835 percent, while the yield on the benchmark ten-year bond rose two basis points to 4.294 percent.
Gold prices stabilized on Monday, after falling by more than 3 percent in the previous session, following a speech by US Federal Reserve Chairman Kevin Warsh, who indicated that raising interest rates may be necessary to contain price pressures.
Spot gold settled at $4,455.29 per ounce by 00:11 GMT, after touching its lowest level since August 19 earlier in the session.
On the other hand, US gold futures for December delivery fell 0.6 percent to $4,504.90 an ounce.
The head of the US Federal Reserve said on Friday that the central bank “will have work to do” if policymakers do not gain the necessary confidence that inflation is heading towards the 2 percent level, in statements in which he came closer than ever to acknowledging that raising interest rates may be necessary to contain price pressures.
Markets currently see a 57 percent probability of raising interest rates at the next Fed meeting in September, compared to 36 percent before Warsh's comments, according to the CME Fed Watch tool. High interest rates usually put pressure on gold prices, as holding a non-yielding asset becomes less attractive compared to assets that do.
This week, the markets are awaiting the release of a series of US labor market data, including job vacancies, the ADP employment report, weekly unemployment claims, and non-farm payrolls data, which may provide additional indicators on the path of US monetary policy during the coming period.
In geopolitical developments, on Friday, Iran condemned the new US economic sanctions, describing them as “state terrorism,” while the Iranian leader said that he prohibits any actions that could harm “social cohesion,” amid fears that escalating financial pressures will lead to the outbreak of unrest within the country.
As for other precious metals, spot silver settled at $66.34 per ounce, platinum rose 0.1 percent to $1,822.46, while palladium rose 0.2 percent to $1,424.89.
Today, Monday, China will release the National Bureau of Statistics' Industrial Purchasing Managers' Index for August at 01:30 GMT, while Germany will release the preliminary reading of the Consumer Price Index and the Harmonized Consumer Price Index on an annual basis for the month of August at 12:00 GMT.
