The end of the week turned out to be very concerning for dollar bulls. The US currency sharply plunged in almost all directions and showed the strongest drop in two weeks.
What caused the weakness of the greenback?
Yesterday, the dollar plunged against most of its major competitors and ended the day near recent lows.
One of the reasons for the loud fall in the USD was the increased fears about the recession.The president of the Federal Reserve Bank of Cleveland, Loretta Mester, added fuel to the fire.
During her speech, the official lobbied for a further increase in interest rates, but drew attention to the growing risk of a slowdown in economic growth in the United States.
Also, Mester said that America will experience difficulties with supplies for some time. This indicates that the threat of recession will not go away in the near future, but will only continue to grow.
Another negative factor for the dollar was the pessimistic assessment of the US labor market data, which will be published today.
The key report on employment in the non-agricultural sector of the country should give an idea of how things are going in the American economy.
Many experts believe that the US labor market continues to be under strong pressure. They expect an increase in the number of people employed in the non-agricultural sector by only 250,000 in July, whereas in early summer the NFP indicator showed an increase of 372,000.
Ahead of the widely expected release of US employment data, the dollar index accelerated the pace of decline. On Friday night, it fell by 0.68%, which was its biggest decline since July 19.
How has the dynamics of USD changed in currency pairs?
EUR/USD
The greenback suffered the most significant losses in a pair with its main competitor, the euro. Overnight, the single currency rose 0.8% and traded at $1.0238.
Meanwhile, most analysts are confident that the advantage of the European currency will be short-lived, as concerns about the energy crisis in the EU persist.
The standoff over the return of the Nord Stream turbine, which the Kremlin says is holding back gas supplies to Europe, showed no signs of resolution this week.
Based on this, experts believe that the EUR/USD pair will trade below parity not only in the short-term future, but also in the perspective of the next few weeks.
GBP/USD
Yesterday's decision by the Bank of England on interest rates did not come as a surprise to the markets. As many economists predicted, the central bank raised the indicator by 50 bps to counter record high inflation.
This was the sixth increase in interest rates in Britain since December last year, but the last time the BoE made a step of 50 bps was back in 1995.
Experts believed that such a sharp increase in the indicator would provoke a rise in the pound, but the initial reaction of the market was, on the contrary, the movement of the GBP/USD pair to the downside.
The reason for the pound's weakness is the BoE's negative forecast regarding economic growth. Politicians expect that by the end of 2022, the UK will plunge into the deepest recession since the global financial crisis, which will last five quarters.
On concerns about a slowdown in economic growth, the GBP/USD pair fell to 1.2064, but was able to recover by 100 points before the close of the trading day. At the beginning of Friday, the pound remained stable at $1.2157.
USD/JPY
The dollar also showed strong negative dynamics against the Japanese yen last night. The USD/JPY pair fell by almost 0.7% to 132.9.
Recall that earlier this week, the greenback showed a sharp increase against the yen, as hawkish comments by Fed members again increased the gap between the yields of US bonds and their Japanese counterparts.
Despite the ongoing monetary divergence, the USD/JPY pair is now on its way to a third consecutive weekly decline.
AUD/USD
Also, the dollar's general weakness has benefited the Australian currency. Overnight, the aussie strengthened against its US counterpart by 0.2% to 0.6970.
The growth of the commodity currency was largely facilitated by the rise in the value of gold. The yellow metal reached a new monthly high at $1,790.
The bullion rally is caused by a surge in geopolitical tensions between America and China. Relations have worsened against the background of the visit of the Speaker of the US House of Representatives Nancy Pelosi to Taiwan.
What can save the dollar?
Despite the growing tension ahead of the release of employment statistics in America, this morning the dollar is struggling to strengthen after yesterday's fall.
At the time of preparation of the material, the dollar index rose by 0.18%, to the level of 105.88.
The main trigger for growth for the USD is now news about the promotion of a bill in the US Senate to reduce inflation.
Recall that last week, US President Joe Biden presented a draft law that is designed to reduce citizens' health care costs and encourage Americans to purchase solar panels and electric cars by introducing new tax benefits for them.
According to the head of the United States, the law on reducing inflation will restore the growth of the American economy through major investments in clean energy.
Speaking to the CEOs of General Motors, Kaiser Permanente and Cummins on Thursday, Biden urged the Senate to approve the bill.
This morning it became known that, despite the objections of Republicans, Democrats plan to pass the bill without their support through a parliamentary process known as reconciliation.
Reuters reports that the bill could be approved as early as Saturday.
