Foreign Exchange Commentary

Summary

• Canadian dollar continues gains ahead of U.S. Federal Reserve interest rate decision.
• Euro currency rangebound near $1.15.
• Yesterday’s much softer than anticipated retail sales potentially points to slowing U.S. economy; uncertainty surrounding future tariff policy.
• U.K. pound sterling holds gains after British CPI which was higher than expected.
• U.S. Treasury yields edge back down to 4.36% on the 10-year bond, remaining below psychologically important 4.50%.
• U.S. jobless claims fall 5,000 to +245,000 in week ending June 14^th, matching forecasts.
• U.S. housing starts weaker than anticipated at 1.256 million; 1.350 million expected.
• Japan’s yen stronger before U.S. Federal Reserve decision; Japan’s trade deficits declines markedly.
• Mexico’s peso near strongest levels since last August flirting with nineteen per dollar.
• Surging oil prices expected to be unwelcome news for Asian currencies.
• Sweden’s Riksbank forecast entails continued strength of krona.
• China’s yuan resumes drop as stronger dollar pressures peers.

Noteworthy

• U.S. Dollar Modestly Stronger as Markets Await Federal Reserve Interest Rate Decision 

The Federal Reserve will weigh in on interest rates today and although not expected to act, traders will closely be watching the policy comments and their implication on potential future moves.

President Trump has turned up the pressure on Federal Reserve Chair Jerome Powell to lower borrowing costs, so far unsuccessfully.

Last week, several economic readings seemed to support the president’s view.  The impact of the Israel-Iran conflict on oil prices may convince the Fed to refrain from cuts for a longer period, however.

The U.S. central bank concludes its two-day Federal Open Market Committee meeting today, with an interest-rate decision due at 2 p.m. ET.  It is expected to hold rates steady, though there could be some change in tone about possible future cuts at Powell’s press conference at 2:30 p.m.  The Federal Reserve will also release economic projections.

Today’s housing starts data, weekly jobless claims (+245,0000) and EIA weekly petroleum report have or are expected to have little market impact.

The U.S. dollar has been relatively rangebound thus far this week ahead of the U.S. Juneteenth national holiday tomorrow.  It is off 9.18% from its record close hit on September 27, 2022, and 7.83% lower from its 52-week high on January 10, 2025.  Year-to-date the U.S. dollar is down 7.07%.

Investors look eager to buy dollar and U.S. debt, at least for today. Treasury yields are falling, indicating strong demand ahead of the Fed meeting. Meanwhile, the dollar is strengthening. The moves indicate that investors are wary of taking risks amid geopolitical tensions and economic uncertainty.

Economic indicators point to a slowdown in the U.S., while the Fed is expected to avoid cutting rates for now. The Dollar Index rose 0.6%, on path for its largest daily gain in three weeks. The greenback is up 0.7% against the euro currency. Yields are down across maturities, with the 10-year at 4.36%.

The dollar would be trading at weaker levels if weren’t for the Israel-Iran conflict, Macquarie Group said in a note. That’s largely because the news around U.S. import tariffs isn’t “particularly good” and because data from outside the U.S. doesn’t point to a further deterioration relative to the U.S., it said.  The geopolitical tensions demonstrate that the dollar still retains some of its safe haven status in certain situations, the note added.  “But we wouldn’t stretch this to say, however, that foreign traders have found renewed confidence in the U.S. and its political economy.”

Investors are the most underweight on the dollar in 20 years, according to Bank of America’s global fund manager survey for June. Investors are most underweight on the dollar, U.S. stocks and energy in June and the most overweight on the eurozone, emerging markets and banks. The survey also shows 61% of investors consider the dollar to be overvalued in June, compared to 57% in May.

The euro currency is little moved even after the latest ZEW survey of German economic sentiment exceeded expectations. The economic expectations gauge rose to 47.5 in June from 25.2 in May. Economists polled by the WSJ survey had expected 35.0. The current conditions index improved to -72.0 in June from -82.0 last month, against an expected -75.0. The euro last trades flat at $1.1556, little changed from levels seen before the data.

Elsewhere the British pound sterling falls as worries over the Israel-Iran conflict weigh on risk sentiment, Monex Europe analysts say in a note. “Recent headlines indicating potential changes to tax policies for (non-U.K.-domiciled) individuals adds uncertainty, influencing sterling sentiment.” Attention will soon pivot to Wednesday’s U.K. inflation data and Thursday’s Bank of England decision, they say. Until then, geopolitical developments will likely dominate, keeping sterling under pressure, they say. Sterling falls 0.1% to $1.3554. The euro rises 0.1% to 0.8522 pounds.

The Bank of Japan could raise interest rates later in the year, supporting the Japanese yen, MUFG Bank said in a note. The BOJ left rates unchanged Tuesday amid trade uncertainty and announced plans to slow the pace of its bond-buying reduction. The BOJ clearly isn’t in a rush to raise rates further and will probably wait for uncertainty to ease, Hardman says. However, it could still lift rates this year, he says. “A trade deal between the US and Japan in the coming months could give the BOJ more confidence to hike rates further if global trade disruption eases as well.” The dollar trades steady at 144.76 yen.

Finally, the Taiwan dollar, Thai baht, and Korean won are most at risk from higher oil prices, Barclays’ FICC Research team says. “Asian currencies generally weaken when oil prices rise due to an oil supply shock reflecting the negative economic hit and impact on current account balances,” the team says. The recent rise in Brent oil price to the $70/bbl-$75/bbl range from around $65/bbl is “generally unhelpful for largely oil-importing Emerging Asia,” the team says. Barclays’ estimates suggest Thailand, Korea and Taiwan are the most exposed. USD/TWD edges 0.1% lower to 29.45; USD/THB is 0.2% higher to 32.51; USD/KRW rises 0.3% to 1,363.