Convenience Yield and Backwardation
Fundamental Analysis

Currency Futures Gain Momentum as the Dollar Weakens

  • Data revealed an increase in US consumer spending for August. 
  • The dollar index ended the quarter with a 3.13% increase.
  • Data on Friday indicated better-than-expected British economic performance.

On Friday, currency futures edged higher against a weakening dollar. Still, the dollar was poised to achieve its largest quarterly gain in a year, marking the 11th consecutive week of gains. Investors factored in the probability of a strong economy and sustained higher interest rates. 

Despite earlier setbacks, the greenback rebounded following data revealing an increase in US consumer spending for August. However, underlying inflation, excluding food and energy, increased yearly to under 4.0%. 

The dollar’s ascent is rooted in expectations that the US economy will better withstand elevated interest rates and higher oil prices than other economies. It follows the Federal Reserve’s recent warning of potential rate hikes and a commitment to maintaining higher rates for an extended period. 

The dollar index, tracking the US currency against six others, fell to 106.09 on Friday, ending the quarter with a 3.13% increase and an 11-week rally, its longest streak in nine years. However, it was down from its 10-month high of 106.84 on Wednesday.

Despite Thursday and Friday’s weaker performance, some analysts anticipate continued dollar strength. 

Meanwhile, a partial government shutdown could have impacted economic data release and potentially hindered economic growth. Hardline Republicans in the US House of Representatives rejected a temporary government funding bill, making it highly probable that federal agencies would partially shut down. However, this crisis was averted on Saturday.

This quarter, the greenback has appreciated by 3.54% against the yen, following an 8.66% gain in the previous quarter. The yen remains a focus point as it hovers near the 150 level, potentially triggering intervention from Japanese authorities. In Japan’s capital, core inflation slowed for the third consecutive month in September, mainly due to declining fuel costs.

The euro saw a 0.10% gain but would record its worst quarterly performance against the dollar in a year, with a 3.08% decline. 

UK GDP (Source: ONS)

UK GDP (Source: ONS)

Meanwhile, the pound experienced a modest rise on Friday. This rise came after data on Friday indicated that Britain’s economic performance since the beginning of the COVID-19 pandemic has been stronger than initially estimated. Nevertheless, the British currency was headed for a quarterly loss of about 3.85% against the US dollar, marking its weakest performance in a year.