U.S. dollar strengthens against major currencies on Monday

The U.S. dollar strengthened against the euro, sterling and yen on Monday following news that the service industry in the U.S. saw an increase in activity in November.

The euro fell 0.42 percent to $1.0494 after reaching its highest rate since June 28 at $1.0585. The sterling was down 0.94 percent to $1.2178, despite hitting its five-month high in Asian trade earlier at $1.2345. Meanwhile, the greenback gained 0.7 percent over the yen to trade at 135.27 per dollar.

Only last month, the dollar index (DXY) — which tracks the dollar’s value against six global currencies — fell by five percent. It was DXY’s worst monthly fall since 2010. Last week, the DXY weakened by 1.4 percent.

Despite growing stronger against several currencies, the dollar also recorded some downs on Monday after falling against the Australian dollar at $0.6806. The currency was also down by 0.25 percent against the Swiss franc to 0.9346 per dollar. The most notable fall was against the Chinese onshore and offshore yuan at 6.9449 and 6.9336, respectively.

According to Dutch financial company ING, the greenback’s aggregate position against G10 currencies is at a neutral position at the moment. ING added that the dollar might continue to weaken but eventually stabilize later.

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ING also noted that the Federal Reserve’s monetary policy, COVID-19 regulation in China and the fluctuation of energy prices would contribute to the dollar’s value in the forex market.

The non-manufacturing Purchasing Managers' Index (PMI) released by the Institute for Supply Management (ISM) showed an increase of 2.1 points from October to 56.5 in November. Economists previously projected that the index would go down to 53.1.

This data indicated that the service industry, which accounts for more than two-thirds of economic activity in the U.S., stayed resilient despite the rising benchmark rates by the Fed. November’s PMI aligned with findings that the U.S. job market and consumer spending remained strong in the past months.

The economic reports have made investors more optimistic about the ability of the U.S. economy to avoid a recession in 2023, according to BMO Capital Markets economist Priscilla Thiagamoorthy. She added that the growth outlook was better, even if the drop in the GDP would likely remain steep.

"I think this issue about 'peak inflation, peak rates, peak dollar' - I think - is slowly turning into a 'persistence of inflation, a persistence of higher-for-longer interest rates,” Rabobank FX strategist Jane Foley said.

China’s COVID-19 policy

The yuan’s stronger position on Monday was a result of the Chinese government’s easing of the pandemic restrictions. Several major cities that underwent lockdowns last month have started to allow their residents to conduct daily activities. Last week, several protests were held in China to demand the Xi administration rethink its zero-COVID policy.

Goldman Sachs analyst Kinger Lau said the reopening of some cities had put China’s GDP growth projection in 2023 higher at 4.5 percent. Industries that will see significant rebounds include consumption and aviation. Compared to 2022, China’s economy will be less volatile next year.

Although this development has improved investors’ sentiments, Kaiyuan Capital chief investment officer Brock Silvers warned that COVID-19 in China had only “been a temporary wound exacerbating other important issues.” Xi administration still needs to revive its real estate and banking sectors and deal with the fallouts of its declining relationship with the U.S.