Weakness of Bonds and Dollar Extends Further – Currency Thoughts
Weakness of Bonds and Dollar Extends Further
May 21, 2025
Ten-year sovereign debt yields climbed overnight by six basis points the U.K., France, Italy and Spain, by five basis points in the United States and Germany, and by two basis points in Japan. The weighted DXY dollar index fell 0.5% so far this Wednesday to a two-week low. The intra-day low of 99.4 compares with a DXY reading of 101.79 on May 12. Dollar losses so far today amount to 0.5% against the yen, 0.4% relative to the Swiss franc and euro, 0.3% vis-a-vis the Australian dollar and 0.2% relative to the Canadian dollar. Depressed by Britain’s fragile political landscape and by adverse CPI news, sterling failed to gain any ground against the dollar.
Boiled down to its essence, President Trump’s obsession with reducing the U.S. deficit is intrinsically threatening to the dollar. Specific actions to cut the deficit have paradoxically increased the imbalance in the short term, creating a vicious cycle of rising deficits feeding more announced counter-measures that at first increase the deficit further and set off a new radical policy measures. There are several immediate factors now depressing the dollar despite rising long-term interest rates.
- Fresh trade strains between China and the United States, this time over AI semiconductor chips.
- Moody’s downgraded rating of U.S. federal debt.
- The tax-cutting bill in Congress, which fiscal watchers believe will drive U.S. debt sharply higher.
- Fed official warnings of stagflation.
- A growing consensus around world financial markets that MAGA-driven changes, far apart from achieving their intended goal, will instead expedite China’s quest to overtake the U.S. economy and replace its hegemonic role.
In stock market action today, share prices closed down 0.6% in Japan but up by 1.3% in Taiwan, 0.9% in South Korea, 0.7% in Indonesia, and 0.5% in India and Australia. Key European stock indices and U.S. stock futures are lower, however.
Bitcoin’s price climbed as high at $107,600 earlier today, not far from the high of $108,288 touched back in late January. The price of oil was goosed 0.8% higher by a report that Israel is planning an attack against Iranian nuclear facilities, and gold has also risen 0.8%.
While the Fed seemingly has shelved the thought of cutting interest rates for several more months, three other central banks eased their key interest rates by 25 basis points.
The Bank of Jamaica implemented its fifth 25-basis point reduction since last August. The new rate level of 5.75% contrasts with 7.0% maintained previously from November 2022. The vote to undertake this latest cut was unanimous and, according to a statement, justified because inflation has been inside its 4-6% target since last September and is projected to remain so in both 2025 and 2026. Caution is nonetheless advised. America’s confrontational tariff policy skews the risks to the central bank’s inflation outlook to the upside.
Bank Indonesia’s policy interest rate has been reduced to 5.5%, its lowest level since January 2023, despite an acceleration of Indonesian consumer price inflation to an 8-month high of 1.95% in April from 1.03% in March. This third 25-basis point reduction since last September, according to officials, will not imperil three broad goals of monetary policy: keeping inflation within a 1.5-3.5% corridor, maintaining a stable exchange rate, and promoting sustainable economic growth. The rupiah, like many currencies, had strengthened noticeably against the dollar during May.
The Central Bank of Iceland is the third monetary authority to cut its interest rate today. The new 7.5% level is its lowest in a year and down from a peak of 9.25% maintained for 13 months until early October 2024. Icelandic CPI inflation of 4.2% last month was six percentage points lower than its peak in February 2023 but still above the central bank medium-term target of 2.5%. Hence, a released statement adopts a cautious tone regarding future easing:
Wage costs have continued to rise briskly, and while inflation expectations have fallen, they remain above target. Although inflation has eased and inflation expectations have fallen in the recent term, inflationary pressures remain. The conditions that would enable an easing of the real interest rate have therefore not yet emerged. Further interest rate cuts will depend on whether inflation moves closer to the Bank’s 2½% target.
British CPI inflation spiked upward to a 15-month high of 3.5% last month, mainly reflecting higher policy change-driven higher costs in electricity usage. Core CPI of 3.8% rose to a one-year high.
In South Africa, CPI inflation of 2.8% in April matched the second lowest reading since June 2020 and was just 0.1 percentage point above March’s reading.
Lebanese CPI inflation in April of 13.0% represents a 62-month low and a huge improvement from the peak of 268.8% in April 2023.
In Slovenia and Poland, respectively, producer prices during the year to April rose 1.0% and fell by 1.4%. However, Moldova’s PPI in that same one-year period rose 5.2%, its biggest such move in 19 months.
Japan’s customs merchandise trade balance produced a negative surprise in April, printing in deficit territory but seasonally adjusted and on an unadjusted basis. The seasonally adjusted JPY 409 billion deficit was the second shortfall in a rows and third so far this year. the January-April deficit of JPY 1.27 trillion exceeded that of JPY 1.92 trillion a year earlier. The unadjusted deficit of JPY 116 billion in April left the year-to-date deficit at JPY 1.71 trillion compared to JPY 2.36 trillion a year earlier.
U.S. mortgage applications sank 5.1% last week, as the 30-year fixed mortgage rate rose to a 3-month high of 6.92%.
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank Indonesia, British consumer prices, Central Bank of Iceland, Central Bank of Jamaica, Japanese trade balance
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