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Writer's pictureDaniels George

Currency Moves, Central Bank Policies, and Trade Trends



On Friday, the dollar dipped below 105, but don’t let that fool you — it’s still on track for an eighth straight week of gains. Why? Well, it’s all thanks to some robust economic numbers that are giving the Federal Reserve plenty of room to stay ‘hawkish’ for quite a while.


Over in the U.S., new jobless claims took everyone by surprise in the last week of August. They dropped to their lowest levels in more than half a year, defying expectations of a modest increase. This move challenged some earlier data that hinted at a bit of a slowdown in the job market.


Adding to the positive vibes, the ISM Services PMI in the U.S. jumped unexpectedly to a six-month high in August. This shows that the U.S. economy is standing strong even in the face of higher borrowing costs.


But wait, there’s more. Things aren’t looking as rosy in Europe and Asia. Weak economic data there is making folks think that other big central banks might hit the brakes on their tightening plans to deal with slower growth.


So, in a nutshell, the dollar’s been flexing its muscles, thanks to strong U.S. data. But keep an eye on what’s happening globally, as it might have an impact on how other central banks play their cards.

The Euro on the other hand has been hanging around the $1.07 mark since the beginning of September, and that’s the lowest it’s been in three months. What’s got traders on their toes? Well, it’s all about trying to figure out what the European Central Bank (ECB) has up its sleeve for next week.


Right now, the odds are pointing to a 64% chance that the ECB will play it safe and keep interest rates right where they are when they meet on September 14th. Why? Recent data is waving some red flags, especially in Germany. The Euro Area’s GDP only managed to crawl up by a meager 0.1% in the first half of the year, according to the latest revisions. Factory orders and industrial production in Germany took a bigger hit than anyone expected, and PMIs for the big economies in the Eurozone are showing signs of contraction in the services sector.


But here’s the twist — while the economy is struggling, inflation is holding steady at 5.3%. That’s more than double the central bank’s target, and it’s raising some concerns about the dreaded ‘stagflation’ scenario.


Now, when it comes to what the ECB is thinking, it’s been a bit of a mixed bag. Their policymakers have been sending out mixed signals about what they plan to do with interest rates, and that’s leaving a cloud of uncertainty hanging over the markets.


Turning our attention to the offshore yuan, it’s been on a bit of a rollercoaster ride lately, weakening past 7.35 per dollar. This marks its lowest levels in nearly a year. Why the dip? Well, recent data revealed that China’s trade surplus took a hit in August. Exports declined due to softer external demand, and imports also suffered losses because of weak domestic consumption.


But, here’s the twist in the tale — both exports and imports didn’t drop as much as folks had estimated. Why? Part of the reason is that port operations got back to normal, and Beijing rolled out several support measures to boost consumption.


In other economic news, China’s services sector growth hit an eight-month low in August, while manufacturing activity unexpectedly expanded. So, it’s a bit of a mixed bag there.


And here’s a big move from the People’s Bank of China: they lowered the foreign exchange reserve requirement ratio by 200 basis points to 4%, starting from September 15th. This is the first such reduction this year, and it’s aimed at preventing further declines in the yuan and giving a helping hand to the struggling economic recovery.


Now, all eyes are on Chinese inflation figures to get a better sense of how things might unfold from here.

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