LONDON – The dollar held steady gains on Monday as investors weighed what the Federal Reserve would look like under Kevin Warsh’s administration, but sharp falls in precious metals and oil prices weighed on commodity currencies. The decline in commodities spilled over into stock markets in Asia and Europe, and in Japan it was the start of a tense week filled with central bank meetings, major economic data and even an election.
The yen once again attracted the attention of traders over the weekend after Japanese Prime Minister Sanae Takaichi emphasized the benefits of a weaker yen in a campaign speech, putting her at odds with the Ministry of Finance, which has been trying to stop the currency from falling. The dollar was flat in Europe after gaining strength on Friday after U.S. President Donald Trump nominated Warsh to be the next Federal Reserve chair. Analysts expect Mr. Warsh to be less likely to call for rapid, across-the-board rate cuts than other candidates, but he sounds more dovish than current Chairman Jerome Powell.
The dollar was last trading at 97.21 against a basket of currencies, little changed from Friday’s 1% rise.
“On the face of it, Kevin Warsh is the most dollar-bullish option that Trump could have chosen,” said Mohammad Alsarraf, a foreign exchange and fixed income associate at Danske Bank.
“I’m not saying the dollar’s political risk premium has disappeared, but at least some of the short-term risk has been reduced.”
Markets have priced in the Fed’s two rate cuts this year, and if approved by the Senate, that seems unlikely until June, when Mr. Warsh takes over as chairman. The euro was last trading at $1.1852, comfortably away from the $1.20 level, while the pound was little changed at $1.3690. The European Central Bank and Bank of England are expected to keep interest rates unchanged when they announce their latest decisions on Thursday.
commodity currency software
Currencies of countries with high exposure to commodity prices and risk sentiment were weak on Monday. The Australian dollar fell as much as 0.7% to $0.6908 ahead of Tuesday’s Reserve Bank of Australia interest rate decision, despite hopes that a rate hike would materialize. It last traded 0.3% lower at US$0.6944.
The Kiwi dollar fell to $0.5991, and the Canadian dollar fell 0.2%. Against the Norwegian krone, the dollar rose as much as 0.7%, while Brent crude oil futures and US crude oil futures both fell about 5% on signs of easing tensions between the US and Iran.
weak yen
The Japanese yen weakened slightly to 154.90 yen to the dollar on Monday, partly pressured by Mr. Takaichi’s comments condoning the weekend currency depreciation and expectations that his party is likely to win a landslide victory in the next House of Representatives election. According to a survey by Asahi Shimbun, the Liberal Democratic Party is likely to have a majority of 233 seats out of the 465 seats in the House of Representatives.
Analysts at Société Générale said the forecast sounded “overly” favorable, but that such a victory would be “hugely significant” for Mr. Takaichi.
“This will give Mr. Takaichi the freedom to pursue expansionary policy,” he said, adding that the market’s initial reaction would be to price in the risk premium for long-term government bonds and the yen. Investors sold the yen and Japanese government bonds in the run-up to the election, hoping that if Mr. Takaichi won a strong vote of confidence, he would be able to adopt even more expansionary fiscal policy, and that the tax cuts touted by his party would further strain already strained government finances. Still, traders remain wary of the possibility of concerted currency intervention by the U.S. and Japan, after the yen soared late last month on talks between the two countries on lowering interest rates, and the struggling yen has recently found its bottom.
