One dollar shaped

After two months’ consolidation in the 1.1800-1.1950 range, volatility returned to the EURUSD. And the value of the greenback once again increased against the single currency to very close to the year’s high, namely 1.1704 on 31 March, without any new records at the time of writing. Yet again favourable economic data powered the US Dollar’s rise. In July in the United States, 943,000 non-agricultural jobs were created. This figure went beyond market expectations of 870,000 new jobs; in addition the data for the two previous months were revised upwards. This solid labor market performance in the United States led directly to in a fall in July’s unemployment rate to 5.4 % (from 5.9 % in June), the lowest unemployment rate in 15 months. Although there are still almost 3.4 million job-seekers in the US, the robustness of the job market’s recovery has continued and has also resulted in pay increases, with the average hourly salary increasing by 0.4 % over the space of a single month and by 4 % year-on-year. The rise in salaries will not fail to concern the Fed. Inflation, which in recent months has been described as transitory and risk-free, has again become the focus of attention. Last week, the Chair of the US Federal Reserve, Jerome Powell, admitted for the first time that inflation had been higher and more persistent than expected. Now attention is turning to the [US] Consumer Price Index, which will be published this afternoon at 2.30. Inflation accelerated in June to 5.4 % as opposed to 0.6 % in June 2020, a 0.9 % increase on May’s figures. The question of a reduction in asset purchases prior to an increase in rates to prevent any acceleration in inflation will once again be a topic within the FED.  Even though the Fed has announced that there will be no rate increases before 2023, dissenting voices are making themselves heard. For example, Raphael Bostic, the President of the Federal Reserve Bank of Atlanta, has stated that in view of the labor market situation and rising inflation, a reduction in injections of liquidity for October/November or even before (if figures are confirmed) should be considered.

It is not only the single currency which has suffered as a result of the revival of interest in the greenback. The robust employment figures have given more confidence to investors, who have abandoned precious metals and more generally safe-haven currencies. The price of an ounce of gold fell by $70 to $1,730, even reaching a low of $1,690 per ounce.  The US Dollar gained 1.5 Cents against the Swiss Franc to top 0.9200, as well as almost two Yen to exceed 110.50 against the Japanese currency.

As expected, the Bank of England last week left its monetary policy unchanged, maintaining its main lending rate at 0.1 % (its lowest historical level) and the volume of its asset purchases on the market at £895 billion. But it is now contemplating a “modest tightening” of monetary policy in the next two years to counter a rise in inflation. Inflation, boosted in particular by energy prices, reached 2.5 % year-on-year in June and could hit 4 % in the fourth quarter, far exceeding the target rate of 2 %. The potential tightening of monetary policy invoked by the Bank of England has bolstered Sterling, which gained ground against the Euro and the Swiss Franc, two currencies which should not be contending with any tightening of monetary policy in the near future, but Sterling also lost ground against the greenback.

Last week the Central Bank of Brazil raised its main lending rate from 1 % to 5.25 %, its largest rise since 2003. And it has now announced an adjustment of the same magnitude for its September meeting. This decision means an aggregate increase of 325 base points since March. Inflation reached 8.59 % in July, far in excess of the annual target of 3.75 %.

Inflation continued in Russia, where it reached 0.4 % in July, after an increase of 0.7 % in June. Year-on-year the rate of inflation has increased by 6.5 %. On 23 July, the Central Bank of Russia increased its base rate by 1 % to 6.5 %. The market expects a further increase at the next monetary policy meeting on 10 September.

After an 11% contraction in recent days, oil price, which on Monday fell to less than $66 per barrel of WTI from $74 on the first day of the month), stabilised and even increased slightly, trading at $68.50 this morning.

Joe Biden’s massive infrastructure-renewal plan, which was yesterday approved by the US Senate (by 69 votes to 30), will now go before the US House of Representatives and is pushing stock market indices from one record to the next. During trading yesterday the Dow Jones set a new high of 35,285.16 points, as did the Swiss Stock Exchange with a high of 12,382.71.