The dollar closed out Friday’s trading session with a weekly loss versus both the yen and the euro, breaking a two week win streak after China’s central bank reported a significant policy change that destabilized the currencies of emerging markets and provided support for some of the industrialized competitors of the USD. The ICE U.S. dollar index climbed 0.2% to 96.3210, but lost 1% on the week. The index lost 1.6% of its value the first three days of the week, before climbing back on Thursday. The impact of the devaluation of the yuan frightened some investors into selling emerging-markets currencies, which in turn provided support for the euro and yen.
However, a round of robust data reports provided support for the dollar later in the week. Three economic reports were released on Friday — industrial production, consumer sentiment, and a producer-price index. Each of these are viewed by investors as being second-tier releases, but when combined with Thursday’s positive July retail sales data, they painted an rosy picture of economic growth that might tempt the Federal Reserve to increase interest rates when they meet next month. Retail sales data has missed economists’ forecasts in 6 out of 7 months, but the most recent report indicates that consumers may be beginning to join in on the larger scale economic recovery.
The yuan did stabilize on Friday, stopping a streak of swift depreciation that commenced after the People’s Bank of China declared on Tuesday that it would modify the way it establishes the yuan’s fixing rate to reflect market forces in a more accurate manner. The currency closed Friday at around 6.39 yuan per dollar, about the same as the previous day. The fixing rate is established each day by the PBOC and presents a mid-point in the trading band for the yuan for each day. Using the existing rules, the yuan will not be allowed to move more than 2% higher or lower than the fix.
The euro traded around $1.1112 on Friday, down 0.4% from the day before, while the dollar was trading at ¥124.29, a decrease from 0.1% on Thursday. The pound was last trading at around $1.5647, climbing 0.3% higher than the trading level seen late on Thursday. Investors will be watching to see if the solid reading on producer prices will make its way into this week’s consumer-price inflation report. The producer-price index climbed 0.2% in July, exceeding economists forecasts.