Central Bankers are Knocking the Greenback Down

The U.S. Dollar is weakening this week with the U.S. Dollar index losing 0.6% to 104.30. Central bankers in major countries are seen trying to push the Dollar down coordinating attack on the Greenback. These are central banks of China, Japan, the United Kingdom, Eurozone and the United States too.

The U.S. Dollar strengthened by 5% against world’s major currencies in the last two months. The Yuan and the Yen were very close to the dangerous edge where these currencies could deteriorate rapidly. Japanese economy is generating enough inflation and policymakers don’t’ want to add additional pressure on it. China is focused primarily on the domestic market and domestic consumers that requires stronger Yuan and expanding personal incomes.

Bank of Japan (BoJ) Governor Kazuo Ueda was the first to verbally attack the Dollar. He said that the BoJ could end its negative interest rate policy by the end of 2023. This is a tremendous shift in its policy as the BoJ was committed to zero or even negative interest rates in the last two decades. The intentions of the Governor may change in time, of course, in inflation would go down, but even a discussion of such intentions is a truly tectonic shift of BoJ’s monetary policy.

China’s central bank has warned speculators and issued forceful guidance to investors with its daily reference rate. It will take action to correct one-sided moves in the market whenever it’s needed and they are confident in keeping the yuan stable. The PBOC warning came a few hours after policymakers set a daily fixing that was stronger-than-expected by a record margin. The record gap between onshore yuan at 7.20 and offshore at 7.36 exchange rates against the U.S. Dollar, China’s central bank market interventions joined by large Chinese commercial banks and strong macroeconomic data send Yuan to six months highs against the Greenback. The Yen rallied too, as it added 1.3% against the Dollar this week.

Now is the turn of the European Central Bank (ECB) and the Bank of England (BoE). However, both the Euro and the Pound are fundamentally too weak to stop the Dollar from rallying. Lower-than-expected inflation in the Unites States in august May help the Dollar to continue down. Otherwise, ECB and BoE efforts to push the Dollar down may lead both economies to stagflation. But, the have narrow options to choose. They have to make hawkish moves. The first will be the ECB and its frontwoman Christine Lagarde who will decide on its monetary move this Thursday.