Dollar takes breather as month-end flows ensue

The dollar faced a marginal decline against a basket of currencies on Friday, impacted by routine month-end rebalancing flows in the market. However, its robust standing was underscored by recent data reinforcing the solidity of the U.S. economy.

U.S. consumer spending displayed unexpected growth in September, indicating a positive trajectory heading into the fourth quarter. Concurrently, inflation remained elevated, as reported in the Friday data release. The dollar index, gauging the currency’s strength against six rivals, experienced a minor 0.1% decrease at 106.47, primarily attributed to these month-end flows. Nevertheless, it marked a 0.3% increase for the week.

Bipan Rai, head of FX strategy at CIBC Capital Markets, commented: “This time of the month there are month-end flows that tend to predominate at certain points. I would expect some of that is reflected in the price action that we are seeing for the dollar today.” Rai further noted that despite robust U.S. economic data, the dollar seemed overbought in the short term.

Traders exercised caution on Friday, refraining from significant directional bets in FX markets, in anticipation of policy meetings by the Federal Reserve and the Bank of Japan scheduled for the upcoming week. Rai emphasized, “Additional positioning doesn’t really make sense until those two key risk events are out of the way.”

Cooling inflation appeared to influence market sentiment, prompting a belief that the Fed might maintain its current stance in the coming months. Nevertheless, underlying price pressures persisted due to strong consumer spending, leaving the possibility of a rate hike later in the year on the table.

The U.S. economy exhibited robust growth in the third quarter, recording its fastest pace in nearly two years. Higher wages, resulting from a tight labor market, played a pivotal role in bolstering consumer spending, contributing to this impressive performance.

Meanwhile, the yen retraced from the 150 per dollar mark, a level that some experts deemed potentially triggering intervention by Japanese authorities. The dollar/yen pair stood 0.5% lower at 149.57. Finance Minister Shunichi Suzuki affirmed Japan’s commitment to responding to currency market fluctuations, stating, “Japan will continue to respond to the currency market with a strong sense of urgency.”

With the Bank of Japan meeting on the horizon, speculation has mounted regarding a potential shift in the central bank’s policy on bond-yield control. Discussions included the possibility of raising the existing limit on yields set merely three months ago. Market participants keenly await the outcome of these critical meetings, anticipating their impact on the global financial landscape.