The US dollar has bounced back after a slump in US stocks pushed investors toward safe-haven assets. The Bank of England's rate hike did little for the pound, while USDJPY bears lack momentum.
The US dollar has found a floor and bounced back as global risk appetite declined. The S&P 500 recorded the largest loss in market capitalisation in history, according to FxPro analysts. Investors worry about the future of artificial intelligence technologies, so they sold shares and bought safe-haven assets.
Hedge unwinding and Fed rhetoric lift the greenback
Investors previously limited themselves to Treasuries, gold, the yen and the Swiss franc, but they have now turned to the greenback. The catalyst was the unwinding of currency hedges by non-residents who had previously been actively buying US shares.
Strong data on jobless claims and productivity, along with hawkish rhetoric from Fed officials, added fuel to the rally. A politically weaker Trump may give the central bank a free hand in the fight against inflation. CME derivatives put the odds of a December federal funds rate hike at two in three, and the probability of two rate hikes over the next 12 months stands at 52%.
The analysts add that the dollar has not lost its strong economy and the Fed's readiness to tighten policy. Its political weakness may be temporary, as it was in the early days of turmoil over tariffs or talk of seizing Greenland.
Pound fails to benefit from the BoE hike
Competitors have been unable to capitalise on the dollar's turmoil after the Democrats' midterm election victory. The Bank of England's first Bank Rate hike since 2023, to 4%, had little impact on GBPUSD.
Andrew Bailey urged investors not to view the move as the first in a cycle of monetary tightening, and the BoE's next steps will depend on developments in the Middle East.
The futures market had anticipated five rounds of tightening before the Monetary Policy Committee meeting, so such rhetoric was bound to be perceived as dovish. Consequently, GBPUSD retreated from a six-week high.
Yen bears lack momentum
Goldman Sachs describes the Japanese yen as an effective hedging tool against market shocks caused by artificial intelligence. Even so, USDJPY bears lack momentum, despite the decline in Treasury bond yields and the expectation that the overnight rate will rise from the current 1.25% to 2% by 2027.
Source: ActionForex
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