U.S. Dollar Gains Strength as Economic Data Highlights Resilience; Yen Slides

By IndraStra Global News Team

Cover Image Attribute: EPA / Everett Kennedy Brown  

The U.S. dollar exhibited strength against a basket of major currencies on Friday, propelled by fresh data on global business activity that underscored the United States' resilient economic position. S&P Global's preliminary U.S. Composite PMI index, tracking both the manufacturing and service sectors, saw a slight dip to 50.1 in September, down from August's final reading of 50.2. While September's figure only marginally remained above the crucial 50-point threshold that separates economic expansion from contraction, the U.S. economy has managed to defy predictions of a recession that many economists anticipated would be triggered by the Federal Reserve's robust interest rate hikes designed to combat inflation.
This data release followed disappointing reports from Europe, where economic activity in France declined more rapidly than anticipated in September. Additionally, survey data covering the entire eurozone indicated a likely contraction in the third quarter.
Market analyst Michael Brown from Trader X commented on the U.S. data, stating, "The U.S. is continuing to outpace the rest of the world, and I think it will continue to do so for some time. Unless we see a sustained pickup in growth in other developed markets, I struggle to take a bearish view on the U.S. dollar over the medium term, as the foreign exchange market increasingly focuses on which central bank will maintain its interest rate stance for the longest duration."
The U.S. dollar index, gauging the currency's performance against six significant counterparts, registered a 0.2% increase, reaching 105.6 after briefly hitting 105.78 earlier in the session. This puts the index on track for a weekly gain of approximately 0.3%, marking its tenth consecutive week of gains and its most extended winning streak in nearly a decade.
Federal Reserve Governor Michelle Bowman emphasized the need for further interest rate hikes to combat inflation effectively, citing the possibility of rising energy prices and a prolonged battle against inflation. While the Federal Reserve chose to maintain interest rates between 5.25% and 5.5% in its recent decision, it emphasized its commitment to keep rates at that level for as long as necessary to bring inflation back to the 2% target.
In contrast, the Japanese yen experienced a decline on Friday after the Bank of Japan (BOJ) decided to keep interest rates in negative territory, just days after the Federal Reserve indicated that U.S. borrowing costs would remain elevated. This move added pressure to the Japanese currency. In recent months, the Japanese yen experienced a steep decline against major international currencies, with a decline exceeding 10% against the US dollar in the current year alone. The country's Gross Domestic Product (GDP) exhibited an annualized growth rate of 6% during this period, nearly double what experts had predicted. The dramatic fall in the value of the yen played a pivotal role in propelling Japanese exports, as domestically produced goods became more affordable for consumers worldwide.  
On Friday, the BOJ maintained its interest rates at -0.1% and reiterated its commitment to support the economy until it gains confidence that inflation will reach its 2% target. BOJ Governor Kazuo Ueda stated at a press conference, "We have yet to foresee inflation stably and sustainably achieve our price target." The yen fell to as low as 148.42 against the dollar, approaching the 150-mark, a level at which analysts have suggested potential government intervention to bolster the currency. The dollar closed 0.53% higher at 148.375 yen. 
Alvin Tan, Head of Asia FX Strategy at RBC Capital Markets, remarked, "I think it's rather dovish, and that's why we've seen the yen surpass 148." Speculation about Tokyo potentially intervening to support the yen has gained momentum. Japan's Finance Minister, Shunichi Suzuki, stated that he would not rule out any options, cautioning against a yen sell-off that could harm the trade-dependent economy.
In the United Kingdom, sterling recorded a 0.47% decrease, with the exchange rate at $1.2237, following data indicating a sharp slowdown in the UK economy in September, possibly teetering on the brink of recession. This decline closely followed the Bank of England's decision to halt its series of interest rate increases, coming a day after the country's rapid price growth unexpectedly slowed down.

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