Dollar Weakens; Aussie Among Top Gainers Before RBA
The dollar dropped against all of its peers in the Group of 10, with long-dated Treasury yields rising for most of the day Monday in the aftermath of Moody’s Ratings’ decision to cut the US’s credit rating. The Aussie dollar was among the best performers in the Group of 10 ahead of the Reserve Bank of Australia’s decision on interest rates.
The Bloomberg Dollar Spot Index falls 0.6%
The US 30-year yield touched the highest since November 2023 before reversing course
“We expected muted near-term effects for the USD given that Moody’s downgrade was long overdue re-calibration of its credit ratings than new information for the market,” wrote Aroop Chatterjee and Erik Nelson at Wells Fargo. “Near term, markets will scrutinize Congressional discussions on the fiscal package”
“Signs of a more expansive package with fewer actual spending cuts may increase market concerns about medium-term fiscal risks, increasing risk premium in back-end US fixed income and the USD,” they wrote
Two Federal Reserve officials, including New York Fed chief John Williams, suggested policymakers may not be ready to lower interest rates before September as they confront a murky economic outlook.
Options show investors keep adding dollar-bearish exposure, with one-month risk reversals turning the most negative on the dollar since the pandemic in early 2020.
AUD/USD rose 0.7% to 0.6453, with the Reserve Bank of Australia expected to cut the cash rate target by 25 basis points on Tuesday
“Easy fiscal policy results in a tight labor market, creating hawkish RBA risks and upside potential for AUD,” Deutsche Bank macro strategist Tim Baker wrote in a note
EUR/USD rallied as much as 1.1% to 1.1288; euro was also boosted by comments from ECB President Christine Lagarde who said the recent rise of the euro against the dollar is a consequence of US President Donald Trump’s erratic policies and an opportunity for Europe
USD/JPY fell 0.5% to 144.93
Hedge funds and long-term investors are re-entering trades looking for the yen to rally ahead of potential currency talks this week between the US and Japan
If Prime Minister Shigeru Ishiba, who prioritizes fiscal discipline and is bond market-friendly, is forced to resign after the Upper House election, upward pressure on interest rate.
Source : Bloomberg
