The pound to US dollar interbank exchange rate weakened somewhat this week, partly because the UK economy has shown growing signs of decelerating.
That said, the so-called greenback has strengthened, first because the USA and China look set to sign a “first phase” trade truce sometime in November.
Meanwhile, the US dollar has also been supported by the fact that, although the Federal Reserve cut interest rates last week, US borrowing costs remain at a comparatively high 1.5%-1.75%.
Lastly, ISM’s widely-respected non-manufacturing PMI for October beat predictions this week, suggesting that America’s economy remains resilient
One reason why the US dollar has gained this week is because, after 16 months of raising tariffs against each other, the USA and China at last look set to sign a trade truce.
In particular, it’s believed that US President Donald Trump and his Chinese counterpart Xi Jinping will meet sometime this month, to sign the so-called “first phase” agreement.
Ahead of this signing, Mr. Trump has suggested that he could annul some previously-imposed tariffs from September, while cancelling December’s new tariffs. Meanwhile, China will reportedly buy vast quantities of US farm goods, and stop manipulating its currency, the yuan renminbi.
Meanwhile, the US dollar has also strengthened this week, because although America’s central bank cut interest rates for the third time this year last week, by minus 0.25%, the Fed may not cut further in the near future.
In particular, Fed Chairman Jerome Powell said last week that it would take a “material reassessment” of America’s economic outlook for US policymakers to cut borrowing costs further.
As a result, US interest rates remain well above those in other G10 nations, for example, the UK’s 0.75%, the Eurozone’s 0.0%, and Japan’s minus 0.1%. This makes investing in USD-denominated assets comparatively attractive, thus supporting the US dollar.
Elsewhere, it’s worth noting that ISM’s closely-watched US non-manufacturing PMI for October rose to 54.7 this week, ahead of forecasts for 53.5, as well as September’s 52.6.
This tells us that America’s dominant services sector accelerated last month, exceeding economists’ predictions. This provides further evidence of the USA’s economic health, boosting the US dollar too.
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