In early Monday trades in Asia, the U.S. dollar extended its recent gains, continuing a trend that has been largely driven by market skepticism about further aggressive rate cuts from the Federal Reserve and disappointment over China’s lackluster weekend stimulus measures. With Japan observing a public holiday, the absence of Japanese traders sapped market liquidity, allowing developments in China to dominate attention in Asian trading.
By Monday morning, the euro had slipped 0.13% to $1.0922, while the British pound dipped nearly 0.2%, trading at $1.3043. The dollar remained stable against the Japanese yen, holding firm at 149.20 yen per dollar. The dollar index, a benchmark that measures the greenback against a basket of six major currencies, stood at 103.10, inching closer to its highest levels since mid-August.
The dollar’s sustained strength is being supported by traders paring back their bets on further substantial interest rate cuts by the Federal Reserve. Last week’s inflation data, coupled with an uptick in jobless claims, reinforced the view that while the Fed is likely to lower rates at its remaining meetings this year, the cuts may be smaller than previously anticipated.
Over the weekend, China’s Finance Minister Lan Foan announced new measures aimed at revitalizing the world’s second-largest economy, which has been struggling with slowing growth, a faltering property sector, and mounting local government debt. These measures included a significant increase in government debt issuance to provide subsidies to low-income citizens, bolster the property market, and replenish the capital of state-owned banks.
While the announcement initially sparked some optimism, market reactions have been tepid due to the lack of concrete details. Investors were left wanting more specifics about the scale and scope of the fiscal stimulus. Lan did not disclose the size of the debt issuance, nor did he outline any immediate steps to tackle more structural economic challenges.
“Markets are likely disappointed that China’s Finance Ministry did not unveil concrete additional stimulus,” said Richard Franulovich, head of FX strategy at Westpac, in a note. “The press briefing mostly reinforces our expectations that China’s policy pivot is worth a one-time 3-4 cents lift in the Australian dollar’s equilibrium, of which about half has already been priced in.”
The subdued market reaction reflects growing concerns that the Chinese government’s policy response may be too little, too late. Franulovich noted that while the announcement may have some short-term impact, meaningful improvement in the Chinese economy would require addressing deep-rooted issues like excess housing supply, demographic changes, and the ballooning debt of local governments.
Ahead of the opening of China’s onshore markets, the yuan was down over 0.2% against the dollar, reflecting the cautious sentiment among investors regarding Beijing’s economic measures. The Chinese currency has weakened by 0.9% since September 24, when the People’s Bank of China (PBoC) launched its most aggressive stimulus program since the pandemic.
Despite efforts to stabilize the economy, the yuan’s depreciation highlights growing concerns about China’s ability to restore robust growth. Moreover, the broader implications of a faltering Chinese economy are being felt across the Asia-Pacific region, with the Australian dollar—a currency closely tied to China’s economic performance—slipping 0.16% to $0.67385.
Australia is highly dependent on exports to China, especially in key sectors like mining and agriculture. Therefore, any signs of weakness in the Chinese economy typically reverberate through the Australian dollar, which is often seen as a barometer for broader market sentiment on China.
“More time may be needed for more thought-out and targeted measures,” said Christopher Wong, a currency strategist at OCBC in Singapore. “But those measures also need to come fast as markets are eagerly waiting for them. Over expectations vs under-delivery would result in disappointment.”
In China’s stock market, the CSI300 Index has been a picture of volatility, marked by record-breaking daily moves and a 16% overall gain in the last month, driven by initial optimism surrounding stimulus measures. However, stocks have become increasingly unstable in recent sessions, as early enthusiasm has been tempered by doubts over whether the government’s economic support will be sufficient to spark a meaningful recovery.
Investors are grappling with a mix of hope and skepticism. The initial positive reactions to stimulus announcements have been replaced by concerns over the lack of follow-through and questions about the long-term viability of China’s economic recovery plan. Key sectors like real estate remain mired in debt, and the government has yet to unveil a comprehensive strategy to deal with structural problems.
Currency movements in major global markets were subdued last week, with the yen and euro both dropping around 0.3%, while sterling shed 0.4%. The dollar index climbed 0.4%, continuing to benefit from the relative strength of the U.S. economy and growing doubts about the effectiveness of monetary easing in other regions.
Meanwhile, U.S. Treasuries are unlikely to provide much of a lead to markets on Monday, given that both Japan and U.S. markets are closed for holidays. This lack of liquidity is expected to keep trading volumes low until markets reopen on Tuesday.
Last week’s U.S. data, which showed slightly higher-than-expected consumer inflation coupled with an increase in weekly jobless claims, has not significantly altered expectations for the Federal Reserve’s monetary policy. Traders still anticipate that the Fed will cut rates by 25 basis points in November and again in December.
However, there is some debate within the Fed itself about the appropriate pace of rate cuts. Fed Governor Christopher Waller, who is set to speak later on Monday, has emerged as a vocal advocate for more substantial cuts. Waller has expressed concern that inflation is now undershooting the Fed’s target, a development that could warrant a more aggressive approach to monetary easing.
Traders are also keeping a close eye on Thursday’s upcoming U.S. retail sales and jobless claims data, which could provide further clues about the health of the American economy and influence the Fed’s decisions in the months ahead.
The New Zealand dollar also remained under pressure, slipping 0.15% to $0.61 in the wake of last week’s 0.8% decline. The Reserve Bank of New Zealand (RBNZ) delivered a surprising 50-basis-point rate cut last week and signaled that further cuts could be on the horizon. This dovish stance has weighed on the Kiwi dollar, which is likely to face continued downward pressure in the coming weeks.
In contrast, Singapore’s central bank kept its currency-based monetary policy unchanged on Monday, reflecting a more stable outlook for the Singaporean economy compared to its regional peers. The Monetary Authority of Singapore (MAS) uses the exchange rate as its primary monetary policy tool and has opted for a steady course amid mixed economic signals from the region.
As global investors digest the latest developments from China, the U.S., and other major economies, the overall mood in the markets remains cautious. The dollar’s continued strength is emblematic of broader concerns about the pace of global growth, particularly in light of China’s ongoing economic challenges and uncertainties about the Fed’s future policy path.
The next few weeks will be crucial as central banks around the world weigh their options in the face of slowing growth, rising debt, and persistent inflationary pressures. Traders and investors will be closely monitoring upcoming data releases and policy announcements for signs of where the global economy is headed in 2024 and beyond.
For now, the U.S. dollar appears to be the currency of choice, reflecting both the relative strength of the American economy and the lingering doubts about the ability of other economies, particularly China, to mount a robust recovery. The focus will remain on China’s economic developments and the Fed’s upcoming decisions, as these two key factors are likely to shape the trajectory of global markets in the weeks and months ahead.
