Dollar Drops on Rate Cut Hopes, Yuan Dives After PBOC Hold Rates

15 Jan 2024 , 08:04 AM

Rekindled hopes of a March rate decrease by the Federal Reserve caused the dollar to weaken on Monday, while the yuan plummeted to a one-month low as China’s central bank shocked investors by maintaining a stable medium-term policy rate.

In contrast to market forecasts, the People’s Bank of China (PBOC) maintained the interest rate on maturing medium-term policy loans on Monday, despite the country’s rocky post-pandemic economic recovery.

As a result, the onshore yuan fell to a one-month low of 7.1813 per dollar, while the offshore equivalent was trading close to Friday’s one-month low at 7.1863.

The release of China’s December industrial output, retail sales, unemployment rate, and GDP for the fourth quarter is expected to shed more light on the country’s economic outlook. China is the second-largest economy in the world.

As the focus of the market continues to be on when major central banks worldwide might start reducing rates this year, traders are also keeping a watch on a reading on UK inflation that is scheduled for later this week.

Although it was not too far from its two-week top achieved last week, sterling fell 0.1% to $1.2739.

The euro traded close to $1.10 and was last seen at $1.0957, up 0.05%. The dollar index fell 0.1% to 102.40 after spending the last few sessions mainly moving sideways.

The CME FedWatch tool indicates that market pricing currently indicates a 78% possibility that the U.S. central bank will start easing rates in March, up from a 68% chance one week ago.

Amid predictions that the Bank of Japan will likely maintain its ultra-loose policy settings at its forthcoming policy meeting next week, the yen continued to face pressure in Asia, trading at 145.06 per dollar.

The Australian dollar, which is frequently used as a liquid stand-in for the yuan, increased by 0.13% to $0.6695. To $0.6234, the New Zealand dollar decreased by 0.11%.

Elsewhere, the Democratic Progressive Party’s (DPP) Lai Ching-te won the presidency over the weekend, despite his party losing its majority in parliament. This caused the Taiwan currency to drop to a more than three-week low of 31.222 per US dollar.

Analysts predict that this week will see a decline in Taiwan’s stock market (.TWII), as selling is encouraged by the threat of policy paralysis in a market that has gained 25% in less than a year.

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