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Fundamental Analysis

Currency Futures Decline on US Economic Strength

  • The US Composite PMI index for September dropped from August’s 50.2 to 50.1.
  • Economic activity in France declined more rapidly than anticipated in September.
  • The US dollar index marked its tenth consecutive weekly increase.

Currency futures fell against the dollar on Friday amid signs of the United States’ superior economic position compared to other major economies. 

US business activity (Source: S&P Global)

US business activity (Source: S&P Global)

S&P Global reported a slight decrease in its flash US Composite PMI index for September, dropping from August’s final reading of 50.2 to 50.1. Still, September’s result hovered just above the critical 50 threshold, indicating economic stability. Despite concerns about a recession due to the Fed’s aggressive rate hikes to combat inflation, the US economy has defied expectations this year.

This data followed disappointing news from Europe, where economic activity in France declined more rapidly than anticipated in September. Surveys across the entire Eurozone suggested a likely contraction in the third quarter. The US dollar index marked its tenth consecutive weekly increase, the longest winning streak in nearly a decade.

Federal Reserve Governor Michelle Bowman emphasized the need for further interest rate hikes to control inflation, citing potential energy price increases and the possibility of a prolonged battle against inflation. The Federal Reserve recently decided to maintain interest rates at a range of 5.25% to 5.5% until inflation returns to 2%.

Meanwhile, the yen weakened as the Bank of Japan (BOJ) kept interest rates in negative territory. This decision diverged from the Federal Reserve’s signal of sustained high borrowing costs in the United States. 

The BOJ maintained interest rates at -0.1% and committed to supporting the economy until it achieved its 2% inflation target, acknowledging uncertainty regarding stable inflation. The yen approached 148.42 to the dollar, nearing the critical 150-mark that could trigger government intervention to bolster the currency.

Speculation grew that Tokyo might intervene to support the yen. Japan’s finance minister, Shunichi Suzuki, kept all options open to prevent a detrimental yen sell-off that could harm the trade-dependent economy. 

Meanwhile, the pound declined after data revealed a sharp slowdown in the UK economy in September, raising concerns about a potential recession. This decline followed the Bank of England’s decision to pause its series of interest rate increases. This pause occurred a day after an unexpected deceleration in Britain’s inflation rate and brought the pound close to its six-month low of $1.22305 on Thursday.