Dollar steadies as calm descends on markets

After a chaotic week, the US dollar was steady against its major peers on Friday (28 August) as calm finally began to descend on the financial markets.
 
The week started with the Greenback slipping to seven-month lows against the euro and the yen, but by the end it was to regain some of its losses and recover 3% compared to Monday.
 
Upbeat data regarding the US economy added weight to the theory that the Federal Reserve will increase interest rates by the end of this year, which would mark the first rise since 2008.
 
Traders also believe that month-end rebalancing flows are likely to support the Greenback, which would bolster bets that the central bank is leaning towards boosting borrowing costs by the end of 2015.
 
Friday saw the dollar index just fall short of the one-week high set on Thursday, but stayed well away from the trough it slumped to on Monday.  
 
USD/JPY made a significant recovery from the beginning of the week, rising 4.1% from a seven-month low. The yen was indifferent to data revealing Japan's inflation dropped to 0% – its lowest level since 2013.
 
The euro was trading 3.7% lower on Friday compared to the lofty heights it reached on Monday, as the tail-spinning global markets boosted euro-funded carry trades.
 
Data showing that the US economy grew faster than initially thought in the second quarter of 2015 helped boost the dollar, and kept alive the possibility of an interest rise later this year.
 
Earlier this week, New York Fed chair William Dudley, a policymaker on the rate-setting Federal Open Market Committee, dashed hopes that an interest rate rise would happen in September, when he said that it now looks “less compelling”.
 
He said the turmoil that has ravaged stock markets across the last two weeks has changed the mood, turning it against an imminent rise. “International developments have increased the downside risk to US economic growth somewhat,” said Mr Dudley.
 
Today, the big show-stopper is the August University of Michigan consumer confidence index. It may not sound like the most exciting bit of data around, but Mr Dudley has tipped it to be the first clue as to whether the stock-market selloff has hurt the US economy.
 
On Wednesday, he told reporters that the report is where investors may see “a little bit” of an effect, but that it could take time for the impact to become visible.  
 
The market will also be waiting with bated breath for more comments on policy normalisation from the Federal Reserve officials who are attending the Jackson Hole Economic Symposium, which started on Thursday and will end tomorrow (Saturday, 29 August).
 
Europe will be more interested in German inflation, and watching out for any signs of disinflation. Disinflation will likely pile the pressure on the European Central Bank to either increase its asset-buying programme or extend it beyond September 2016.

Amazingly, that was the last weekly feature for August 2015 (where does the time go?). We'll be back on Tuesday (Monday being a bank holiday here in the UK) with the Weekly Market Analysis, in which we'll have a look at what the first week of September may bring. Have an excellent weekend.