The dollar breaks into the summer in full swing, at the start of the day effectively overtaking the euro and the yen. But will it be able to stay on the wave of growth for a long time? How is June predicted for the greenback and its competitors?
The US currency is moving steadily upward this morning. A tailwind for it is the growing yield of US government bonds.
Overnight, the underlying yield on 10-year Treasuries accelerated to its highest level since May 19 at 2.884%. This dynamic was provoked by increased fears about global inflation.
The consumer price index in the euro area for May was published yesterday. Due to the sharp rise in energy prices, the figure soared to record levels.
Annual inflation in the countries of the EU was 8.1%, which is the highest since the introduction of the single European currency in 1999.
High inflationary pressures could force the European Central Bank to become more hawkish at its June meeting. This is a positive factor for the euro.
However, at this stage, the euro has not been able to benefit from the hot stats, as a record surge in inflation in the EU has spurred demand for a protective dollar.
EUR/USD has plunged 0.15% this morning, continuing its retreat from a 5-week high of $1.0787 reached on Monday.
Increased demand for the dollar as a safe-haven asset, as well as higher yields on US bonds, put strong downward pressure on the Japanese currency as well.
Thus, at the time of publication, the USD/JPY pair rose by 0.28% and reached a 2-week peak of 129.07.
The strengthening of the dollar against these two currencies helped its index to rise by 0.19% on Wednesday to 101.94.
Recall that at the beginning of the week, DXY fell to a monthly low of 101.29 points, and in mid-May jumped to a 20-year high above 105.
The dollar index is expected to fluctuate in this range (between 101 and 105) until its bullish trend resumes. And this, apparently, should not be expected in June. We understand why.
Two reasons for the rise of the yen
Many analysts believe that in the conditions of total price growth, it will be difficult for the Bank of Japan to maintain its dovish policy and keep the yield on 10-year Japanese bonds at 0.25%.
Markets are now anticipating a tipping point where the BOJ will choose to print fewer yen and thus allow its currency to rise.
Another reason why the USD/JPY pair may collapse in June is that now the dynamics of the Japanese currency depends less on the strategy of the BOJ and more on the situation in China.
The removal of quarantine restrictions in the largest financial center - Shanghai - occurred only after local authorities completely suppressed another outbreak of coronavirus. It was too costly for both China and the global economy.
Despite this, Beijing continues to firmly adhere to a policy of zero tolerance for COVID-19, instead of opting to vaccinate its population with Western drugs.
If this coronavirus tactic proves ineffective and a new wave of COVID-19 sweeps China in the near future, it will provoke a huge influx of investment in the regional safe harbor - the yen.
Euro boom is brewing
Not so long ago, European Central Bank President Christine Lagarde made it clear that the rate hike in the EU will take place only in July.
However, the latest data on inflation in the eurozone indicate that the central bank may raise the cost of borrowing as early as June.
Inflation in the countries of the bloc is growing and causes panic among the population, whose standard of living is rapidly falling. It seems that Europeans are already less worried about what is happening in Ukraine and more about their own well-being.
Now they have to save literally on everything and deny themselves a lot. Consumer demand in the EU is declining significantly, and this could force the central bank to act faster or harder.
There is an opinion that instead of an early increase in rates, European officials will decide to return the cost of borrowing to zero in the near future by raising the rate not by 25 bp, but immediately by 50 bp.
However, now any hawkish position of the usually cautious ECB should lead to an increase in the euro.
Will the dollar fall?
It would seem, why should the world reserve currency fall behind, while the Federal Reserve is pursuing an aggressive monetary policy, and the US is ahead of the rest of the world in the economic cycle?
Everything depends on inflation. Already, some Fed officials are saying that the annual price increase seems to have reached its peak.
If in June, when the whole world is still stormy from high inflation, the Fed confirms that the worst is over, this will provoke a significant decline in the dollar against its main competitors.
