The US dollar rebounded, while the euro unexpectedly weakened

On September 10th, the global foreign exchange market witnessed a situation where "buy the rumor, sell the news". The European Central Bank raised interest rates for the second time this year, increasing the benchmark interest rate by 25 basis points. The purpose was to curb the inflationary pressure caused by rising energy prices. Geopolitical conflicts in the Middle East disrupted energy supply, pushing up the overall price level in Europe. According to the conventional logic of exchange rates, a central bank's interest rate hike would be beneficial for the appreciation of the domestic currency.

However, after the resolution was announced, the euro weakened rapidly, falling to 1.1612 against the U.S. dollar fell slightly by 0.19% on the day during the closing session. Investor sentiment is now more concerned about the negative impact of the interest rate hike on the economy. The European Central Bank's tightening of monetary policy has led the market to worry that it will further suppress the already weak economic recovery pace in the Eurozone. The pessimistic economic expectations have offset the benefits brought by the interest rate hike, dragging down the euro exchange rate finally.

In the early part of this week, the U.S. dollar weakened due to oil prices and U.S. treasury yields, accumulating considerable room for correction. The dollar staged a strong recovery on Thursday, clawing back some of its weekly losses. The U.S. dollar index rose by 0.28% in a single day, closing at 99.06. The latest PPI performance was in line with market expectations. After the data was released, market expectations for Fed rate hikes largely increased. Institutions generally believe that the pace of inflation decline is relatively slow, and the Fed is unlikely to quickly shift to a loose monetary policy. There is even a possibility of another rate hike.

Foreign exchange analysts said that the important reason for this round of U.S. dollar rebound is the U.S. inflation data. Compared with the hawkish rate hikes of the European Central Bank, the tightening expectations brought about by the resilience of U.S. inflation provide stronger support for the U.S. dollar. The market has generally entered a cautious wait-and-see state. Once the CPI data exceeds expectations and strengthens, the rebound strength of the U.S. dollar will further increase.

As the U.S. dollar index went up, most major currencies outside the U.S. dropped. The Swiss franc depreciated largely, with the U.S. dollar rising against the Swiss franc by 0.35% to reach the 0.813 level. The Canadian dollar against the U.S. dollar fell by 0.20%, and the British pound against the U.S. dollar dropped by 0.27%. The overall weak pattern of non-U.S. currencies was clear.

In the longer term, the yen was supported by the general market view that the Bank of Japan would most likely follow up with a rate hike. At the same time, the cross-rate of the euro against the yen rose slightly by 0.34%. Against the backdrop of non-U.S. currencies weakening, the RMB has shown an independent and stable performance. The U.S. dollar against the RMB remained stable at around 6.715, holding firm at the nearly three-and-a-half-year high.

At the end of July this year, the U.S. Treasury Department jointly with the Bank of Japan carried out an exchange rate intervention operation. This intervention did not use U.S. dollar reserves but chose the euro as the operation tool, successfully stabilizing the yen exchange rate. The U.S. Treasury Department initiated a large-scale bond repurchase operation to suppress the excessive upward movement of long-term U.S. treasury yields and stabilize the domestic bond market. The stability of the bond market provided support for the U.S. dollar exchange rate. The U.S. tends to use financial tools as diplomatic policy means. Subsequent regulatory tools for exchange rates and bond markets will be more flexible and regularized, and external market fluctuations will be more frequent.

The core focus of the short-term foreign exchange market is concentrated on the U.S. CPI data. Strong data will further consolidate the rebound trend of the U.S. dollar, while weak data will cool down the expectations for the Fed's interest rate hike, and the U.S. dollar is likely to fall again. Geopolitical situations in the Middle East and fluctuations in oil prices will bring uncertainty to the foreign exchange market. Currently, the market is no longer in a simple single-directional rise and fall pattern.