US Dollar Ends Week On a Stronger Note, but Euro is Expected to Catch Up Soon

May 22, 2021
US Dollar Ends Week On a Stronger Note, but Euro is Expected to Catch Up Soon May 22, 2021 Lennox Hamilton

The US dollar finished the week in condescending disregard of its skeptics Friday as currency exchange rates along with the US government bond returns, as a result of a barrage of economic jolts, and a few at the end-of-the-day drops for the European currencies.

The US dollars were purchased and several other currencies liquidated before the weekend, paving way for intraday benefits for the greenback over its peers, barring the Loonie and a small number of emerging market currencies such as the South African Rand.

Gains increased and gathered momentum after IHS Markit stated that it PMI (purchasing mangers’ index) for the US services industry had increased from an upwardly amended 64.70 in April to a historical high of 70.1 in May as an increasing portion of the economy got back to normal, paving way for the activity and output from the services industry to surge.

In the meantime, the similar survey of the country’s manufacturing industry also improved to a fresh historical high of 61.50 in May, from 60.50 in the earlier month, with both adding weight to the forecast that the world’s largest economy probably change gear higher in the second-quarter.

Simona Gambarini, an analyst at Capital Economics, opined that the recent flash PMIs add strength to the forecast that the economy will be growing at a quicker rate in the US, in comparison to the Eurozone over the forthcoming years. That implies swift increase of long-term yields in the US, in comparison to the Eurozone, and will enable the US dollar to gain against the Eurodollar.

A robust US economic rebound is eventually a blessing for economies of other countries and also their currencies, even though the economic data and the rise in the US government yields seemed to have fueled another rally of the US dollar.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, highlighted out the argument that housing sector is booming and won’t subside, although sales recorded its peak in October 2020 and applications pertaining to finance for house purchase declined by 19% between January and April. He further pointed out that sales are following applications for mortgage in the usual manner.

Data published by the National Association of Realtors indicating a decline in sales to 5.85 million units in April, from 6.01 million units in March, mirroring a likely reversal, and the rising yield in the bond market was brushed away by market participants Friday.

Analyst Shepherdson at Pantheon has stated that the US home sales will probably decline further and hit a low of about 5.20 million units in the forthcoming months, pointing to mortgage application info, which has positive relations with the comprehensive trend in sales but is a core gauge of the latter.

Shaun Osborne, chief FX strategist at Scotiabank, expects the greenback to remain sluggish while the US yields do not overshoot and highlighted that although the DXY stayed near to the late February nadir on Friday, the finishing of the index for the week at that point reflects the lowest level for DXY since the beginning of 2018.

Across the board, the US dollar remained stronger on Friday, but particularly against the eurodollar, with a -0.29% drop there performing an important role in raising the ICE Dollar Index off of what was near to its lowest point in over three years.

The euro, which makes up 57% of the ICE Dollar index, had been falling for a while before the US economic data was released, and roughly at the time the European Central Bank (ECB) President Christine Lagarde spoke at a media briefing following a Eurogroup session.

ECB President Lagarde arrived with the intention of shaking things up a bit. According to Mathias Van der Jeugt, head of research at KBC in Brussels, she held a bearish mood, claiming she noticed the recent yield increases and that the ECB is actively watching it.

In addition to mentioning recent rises in European bond yields, Lagarde stated that it is still too premature to address “medium to long-term questions,” which may be a response to recent rumors in some quarters that the ECB is considering tightening its coronavirus-motivted quantitative easing program.

With a cumulative budget of €1.85 trillion, the ECB’s Pandemic Emergency Purchase Program (PEPP) purchases European government bonds every week to hold yields down and maintain favorable borrowing terms for governments.

The European Central Bank continues to purchase €20 billion per month under the actual QE program, which has no pre-set parameters such as aggregate allocation or final date, even though analysts state that the €1.85 trillion would lapse sometime about April or May 2020 in case the bank continues to maintain the current rate of weekly buying.

In a note to clients, KBC’s Van der Jeugt wrote that the statement hit the German yields, with the curve getting flattened by 2-2.4 bps for the middle- and long-term bonds. Likewise, long-term US yields lost roughly 1bp, with the EUR/USD falling to 1.219, from 1.22.

A portion of analysts believe that reduction of asset purchases under the PEPP program to a minimized weekly rate will happen in June. Further reduction would extend the ECB’s remarkable assistance for the Eurozone economies and its improved comportment in the bond market, but during the same period be seen by the market as a manifestation of optimism in the Eurozone economy, which last week took measures to exit from lockdown in several areas.

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