What Is Happening in Monetary Markets?

On Monday, the risk-on attitude and a surge in the European stock market helped the U.S. dollar decline versus the euro and the pound.

According to a survey released on Monday, investor sentiment in the eurozone climbed in November for the first time in three months, indicating optimism that this winter’s gas rationing across the continent won’t be necessary due to recent better weather and declining energy costs. Meanwhile, traders noted that investors are still hoping China would relax its COVID limitations, despite authorities claiming they do not intend an imminent reopening. The pan-European STOXX 600 index increased by 0.5%.

COVID-19 and Currency Fluctuations’

The safe-haven U.S. dollar index decreased by 0.54% to 110.49 when measured against a basket of currencies. After the previous week, it had lost almost 2%. Risk assets rallied on Friday due to reports that China might modify its “dynamic-zero” COVID-19 policy significantly shortly. However, the offshore yuan decreased on Monday by 0.8% to 7.2347 against the dollar after China stated over the weekend that it would continue to use its “dynamic-clearing” strategy to deal with COVID-19 cases as soon as they surfaced, giving little indication that it would modify its outlier zero-COVID strategy nearly three years into the pandemic.

Risk-sensitive In Asia trading, the Australian and New Zealand dollars also sank dramatically, but they rose again as soon as European markets opened. The euro climbed to its highest level since October 27. Meanwhile, another risk-sensitive currency, the sterling, recovered previous losses to trade up 0.66% to $1.1446. Last seen up 0.27% to $0.9986.

The Chinese trade numbers released on Monday revealed that exports and imports unexpectedly declined in October—the first simultaneous decline since May 2020—highlighting the economic effect of China’s zero-COVID policy.

Investors were also analyzing Friday’s U.S. employment data, which revealed that businesses added more positions than forecast (261,000) in October and that hourly earnings increased, indicating a persistently tight labor market. However, signs of some market relaxation, along with an increase in the unemployment rate to 3.7%, fueled expectations that the long-awaited Fed turn could be on the horizon, curbing the dollar’s gains.