The euro hovered around $1.13 at the end of December, remaining close to a recent 17-month low of $1.12 and heading for a 7.5% yearly loss against the greenback, amid concerns over Europe's slowing economic growth on the back of surging prices and new COVID restrictions and as the European Central Bank is seen tightening policy slower than the US Federal Reserve. The bloc's central bank announced earlier this month a reduction in the pace of its asset purchases due to the progress on economic recovery and towards its medium-term inflation target, but signaled interest rates will be kept at record-low levels for some time. Elsewhere, the Fed said it would speed up its tapering of bond purchases, putting it on track to conclude it in March 2022 and paving the way for three interest rate hikes by the end of next year.
The British pound broke above $1.34 at the end of December, the highest in nearly five weeks as traders turned more positive about the economic outlook amid upbeat economic data and signs the Omicron variant is less severe than previously thought. The latest data showed the UK economy recovered from the pandemic faster than previously thought, while the British government has decided not to tighten COVID restrictions ahead of the Christmas holidays. Earlier this month, the Bank of England unexpectedly raised rates for the first time since the onset of the pandemic due to a spike in inflation.
The Australian dollar was little changed around $0.722 on Monday. Meanwhile, the aussie was pressured by central bank dovishness, with governor Philip Lowe reiterating in a recent speech that the Reserve Bank of Australia would keep interest rates at record low in 2022. However, strong jobs data and high inflation expectations raised the likelihood that the central bank will wind down its pandemic-era stimulus early next year. The RBA is considering three options for its quantitative easing program ahead of its formal review next year, including ending its bond purchases as soon as February.
The Indian rupee strengthened to 75 per USD, but still remained close to 18-month low of $76.34 hit on December 15th and is set to end the quarter 1.8% lower amid relentless foreign fund outflows after rating agencies like Goldman Sachs and Nomura Holdings lowered the outlook for Indian equities, citing them as overpriced. Global funds pulled USD 4.2 billion from the domestic equity market and USD 587 million from the bond market this quarter. Also, RBI’s dovish monetary policy in contrast with the hawkish Fed decision, where it signaled as many as three rate hikes in 2022, reduced the INR appeal among investors. At the same time, India showed signs of slowing growth through its record high trade deficit (USD 23 billion) and a higher-than-expected jump in retail prices (14.2 percent vs expected 11.9 percent) last month. This comes at a time when the country's Omicron cases have already reached over 300, casting further doubts on its slowing economic recovery.
The offshore yuan eased towards 6.38 per US dollar in a holiday-thinned trading on Monday, as investors stuck to familiar ranges in the final week of 2021. The Chinese currency is set for a second straight year of gains, on course to rise about 2.5% against the dollar. That would make it the best performing emerging market currency in 2021, underpinned by robust exports, a growing trade surplus and ample onshore dollar liquidity. Meanwhile, market participants shifted their focus to whether the currency could sustain its strength next year, with traders dialing back long positions amid concerns that authorities may rein in the currency’s gains. The People’s Bank of China has persistently set a weaker-than-expected yuan fixing since mid-November. The central bank has also been increasing its foreign currency buying from banks, and hiked the foreign exchange reserve requirement ratio by 200 basis points to 9% effective Dec.15.
The Japanese yen drifted lower towards 114.5 per US dollar on Monday, the lowest in 4-weeks as risk appetite returned to markets and as the Bank of Japan is lagging behind other central banks in scaling back monetary stimulus. Inflation remains subdued despite higher input costs as firms remain reluctant to pass on rising costs to consumers. Last week, prime minister Fumio Kishida said that he hoped the BOJ continues to make efforts to achieve its 2% inflation target, expressing a desire for supportive monetary and fiscal policies. Meanwhile, the draft budget, approved on Friday, totals 107.60 trillion yen, marking a record high for the 10th straight year.