PBOC policy strengthens USD, DXY eyes October high

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PBOC policy strengthens USD, DXY eyes October high
Credit: © Reuters.

On Wednesday, the People's Bank of China (PBOC) maintained its foreign exchange policy, which has inadvertently contributed to the strength of the US dollar. The PBOC set the yuan's daily reference rate at 7.1025 against the dollar, a slight adjustment from 7.1028 the previous day. This move did not encourage further weakening of the yuan, with the USD/CNY trading at 7.2400 and the USD/CNH slightly below 7.2600, indicating a reversal from the previous day's increase.

Despite the PBOC's stable fixing, the US dollar has found support from other factors. Recent comments from Federal Reserve officials have suggested a cautious approach towards reducing interest rates due to persistently high inflation. This sentiment was echoed by Fed Chair Jay Powell and Vice Chair Philip Jefferson, who both recognized the slower progress on inflation and the potential postponement of rate cuts. Their statements contributed to a brief spike in 2-year Treasury yields to 5.0%, a level last seen in November.

The US dollar's strength is also reflected in the broad decline of currencies from China's trading partners, which has resulted in the yuan strengthening on a trade-weighted basis. The PBOC appears more comfortable with a gradual depreciation of the yuan, especially given China's soft inflation and export data.

As the dollar continues to gain, the Dollar Index (DXY) is targeting the 107.00 peak reached in October. Market participants are now watching to see if US equities can maintain their resilience.

"We’ll see how long US equities can stay strong in this environment: a sell-off in stocks would be the final element for a perfect USD storm," ING analysts said in a note.

InvestingPro Insights

The Dollar Index (DXY) has shown a stable upward trajectory in recent times, with a 1 Week Price Total Return as of April 18, 2024, at 0.89%. This aligns with the sentiment of the Federal Reserve's cautious stance on interest rate adjustments, which has been a contributing factor to the dollar's strength. The Year-To-Date Price Total Return stands at 4.69%, suggesting a continued bullish trend for the currency since the beginning of the year.

Investors tracking the DXY's performance will note its 1 Year Price Total Return of 3.95%, which is indicative of the dollar's steady appreciation over the past year. With the previous close at 106.26 USD, market observers are considering whether the DXY will revisit or surpass the 107.00 peak observed in October.

InvestingPro Tips provide further insights into currency trends and could potentially signal whether the DXY's upward momentum is sustainable. For those looking to explore these trends in depth, InvestingPro offers additional tips, with the current count at 15 more tips available. These tips could be invaluable for understanding the potential implications of the Federal Reserve's policy decisions and the PBOC's forex strategy on the DXY's movement. To take advantage of these expert insights, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.

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