The dollar continued its upward trajectory into a second week of gains, bolstered by a modest rate hike in Japan and a surprising rate cut in Switzerland, underscoring the divergence in interest rate policies among major central banks.
This week saw a notable shift in global monetary policy, as the Swiss National Bank and central banks in emerging markets either slashed rates or signaled their intent to do so, with the European Central Bank likely to follow suit in June.Despite the yen holding its ground, the dollar strengthened against all G-10 currencies, fueled by the robust U.S. economy and higher interest rates, which attracted investment inflows.
However, the Swiss rate cut, the first among major European central banks, marked a significant departure from the status quo.Shaun Osborne, chief FX strategist at Scotiabank in Toronto, remarked on the unexpected move by the SNB, triggering speculation about potential actions by other European central banks.
Meanwhile, the Federal Reserve maintained its overnight rate and reiterated its projection for three cuts by year-end, pending further confidence in inflation reaching its 2% target. Market expectations for rate cuts this year have moderated, down from earlier projections.
The Swiss franc, which was the strongest G10 currency in 2023, depreciated approximately 1.5% against the dollar this week and around 6.6% year-to-date. The dollar index, gauging the U.S. currency against major trading partners, edged up, while the dollar slipped against the Japanese yen, approaching levels that prompted Japanese intervention in 2022.The euro climbed to a three-week low as the dollar gained momentum, trading at $1.0829. The Bank of Japan’s announcement of a historic shift away from negative short-term rates and longer-run yield caps failed to bolster the yen, disappointing market expectations.
Amid growing anticipation of policy easing in China, its currency faced downward pressure, prompting intervention by state banks and unsettling equity investors.
