Foreign Exchange Commentary

Summary

• As some traders anticipated the Canadian dollar rose ahead of Canada’s Friday payrolls and current-account data.
• Euro currency fell earlier in the week on French political worries.
• U.S. Treasury yields steady near 4.24% on the 10-year bond despite U.S. 2^nd Qtr. GDP being revised higher.
• U.S. 2^nd Qtr. GDP rose an annualized +3.3%; estimate +3.1%.
• U.K. pound sterling remains well bid above $1.35 in spot market.
• U.S. jobless claims 229,000 in August 23^rd week; estimate 230,000.
• At mid-week euro currency hits three-week low as leveraged short-term stops were triggered.
• U.S. August Consumer Confidence 97.4 exceeding estimate of 96.5.
• Japanese yen weakens; 10-year JGB yield hits highest since 2008.
• Swedish krona touched a 7-week high versus the euro currency.
• India says secondary impact of U.S. tariffs pose challenges.
• EIA: Crude -2,392k Bbl, median estimate – 2,000 Bbl.
• China’s (offshore) yuan strengthens to highest in 10-months versus the U.S. dollar.

Noteworthy

• U.S. Dollar Trims Losses After U.S. GDP Remains Rangebound

The U.S. dollar—and U.S. securities markets more broadly—haven’t reacted dramatically to the attempted firing of Federal Reserve (Fed) Governor Lisa Cook by President Trump. One explanation could be the significant uncertainty that still hangs over the outcome and its near-term implications for interest-rate policy.

It remains unclear whether President Trump will successfully remove Cook from the Fed, leading to a legal battle and injecting uncertainty around future Fed policy. Still, more adversity for currency markets could be ahead if the move proves a durable threat to Fed independence, some analysts suggest.

The U.S. dollar index is trading roughly flat thus far this week as markets await tomorrow’s all-important readings on personal consumption expenditures (PCE).

Elsewhere in the Europe, the Swedish krona could extend gains on European fiscal stimulus and global easing.  The Swedish krona has scope to rise further after hitting a nearly seven-week high against the euro earlier, UBS Global Wealth Management strategists said in a note.

The krona has recently recovered after suffering losses earlier in summer after the Riksbank cut interest rates and signaled further cuts at the June meeting.

“The Riksbank’s continued easing bias and Sweden’s exposure to tariffs are offset by supportive European fiscal measures and global easing, providing room for krona strength,” the strategists said. UBS expects the euro to fall to 10.50 krona by September 2026.

Outside of the euro currency block the Swiss franc might not adversely react to negative interest rates.

The Swiss franc wouldn’t necessarily fall if the Swiss National Bank cut interest rates into negative territory, UBS Global Wealth Management’s Dominic Schnider says. The franc is the preferred safe-haven currency, he says. “And if it’s a risk-off world that we live in, negative rates will not initially prevent a strong franc.”

However, negative rates would likely only materialize in the event of a significant deterioration in the global and/or European macroeconomic outlook or a substantial narrowing of the rate differential with the European Central Bank that resulted in sustained franc appreciation, he says. 

In the United Kingdom Bank of England (BoE) interest rate expectations favor near-term sterling gains.

The outlook for sterling looks positive in the near term given expectations that the BoE will take a cautious approach to cutting interest rates, ING analyst Francesco Pesole said in a note.

The recent scaling back of BoE rate cut bets continues to underpin “decent sterling short-term momentum.” The euro could fall below 0.8600 per Great British pound, he says. “In [sterling versus the dollar], we still think a structural break above $1.35 is a matter of when rather than if.”  As of this writing the Great British pound is holding nicely above $1.35.

Finally, Euro-zone debt worries could dent the euro currency.

The euro currency could correct lower after recent gains against the dollar due to eurozone debt concerns, Commerzbank’s Antje Praefcke said in a note. French Prime Minister Francois Bayrou’s government is expected to be toppled in a confidence vote next month over its plans to cut the budget deficit.

This highlights how the euro could weaken if euro-area debt gets out of hand, Praefcke says. If vulnerable euro-zone countries fail to implement reforms, this could increase pressure on the European Union (EU) to take on joint debt and on the European Central Bank to push down yields through additional bond purchases and/or a lower interest rate. “That, in turn, would be negative for the euro.”

Similarly, here in the United States, Federal Reserve Independence risks, rising U.S. debt are structural headwinds for the U.S. dollar.

Threats to the Federal Reserve’s independence and a worsening U.S. budget deficit are structural stress factors for the dollar, Commerzbank’s Antje Praefcke said in a note. President Trump’s move to fire Fed Governor Lisa Cook raised fresh concerns about the central bank’s independence, which is “essential for maintaining the value of a currency,” she says.

A central bank must make painful decisions to address imbalances in the economy, she said. The U.S. dollar is also facing a hit from U.S. debt sustainability concerns. Trump’s tax and spending bill could end up being more expensive than currently planned. While some tax breaks are supposed to be temporary, experience shows it’s difficult to reverse these concessions when expiry approaches, she said.