Dollar Retreats in Reaction to Aggressive Moves by China

The weaker U.S. Dollar set the tone last week in the currency markets. The Greenback was down most of the week against a basket of currencies before mounting a modest comeback on Friday following the release of the U.S. jobs report.

Most of the heat on the dollar was coming from China. The word on the street was China ordered its state-owned banks to sell dollars. The dollar weakened on the news, and continued to fall further against commodity currencies like the Australian and New Zealand Dollars.

This trend is likely to continue if China decides to continue to sell off its dollar reserves. To some, the action vindicates President-elect Donald Trump, who as a candidate for the office, called China a currency manipulator.

This accusation may have been supported by the price action in the Dollar/Yuan last week. The Forex pair closed at 6.84776, down 0.125 or -1.79%. Over the week-end, it was reported that “China’s foreign exchange reserves fell for a sixth straight month in December to the lowest since early 2011, but held just above the critical $3 trillion level, as authorities stepped in to support the Yuan ahead of the U.S. President-elect Donald Trump’s inauguration.”

The move by China may have been designed to prop up the Yuan, and use capital controls and other tools to retrain businesses and individuals rushing to send money offshore.

The March U.S. Dollar Index futures contract closed at 102.209, down 0.077 or -0.08%.

U.S. Economic News

Last week’s series of U.S. economic reports was strong enough to keep the Fed on its path towards another interest rate hike.

ISM Manufacturing PMI and ISM Non-Manufacturing PMI both posted solid numbers. The Weekly Unemployment Claims report came in at a 43-year low.

The minutes from the December Federal Open Market Committee meeting contained no real surprises but did reveal a hawkish tone. The minutes showed the Fed discussed Trump’s fiscal stimulus policies. It also warned about a possible jump in inflation.

The week-ended with a mixed to strong U.S. Non-Farm Payrolls report. The headline number came in lower than expected, but Average Hourly Earnings were strong.

Australian and New Zealand Dollars

The AUD/USD closed the week at .7293, up 0.0092 or +1.28% and the NZD/USD finished at .6954, up 0.0038 or +0.55%. Data was light from Australia and New Zealand with traders primarily reacting to strong Caixin Manufacturing PMI from China, higher gold prices and a generally weaker U.S. Dollar. Australia’s Trade Balance came in strong at 1.24 billion, up from -1.12 billion.

Japanese Yen

The USD/JPY ended the week at 116.940, down 0.039 or -0.03%. The dollar’s reaction to the actions of the Chinese government helped drive the Greenback lower early in the week, but it was able to recover some of its losses after the release of the jobs data. The carry trade had a minimal effect on the market until Friday.