© Reuters. FILE PHOTO: U.S. dollar banknotes are displayed in this illustration taken, February 14, 2022. REUTERS/Dado Ruvic/Illustration

By Herbert Lash and Harry Robertson

NEW YORK/LONDON (Reuters) – The dollar rose on Monday after New York state factory activity in April increased for the first time in five months, helping bolster expectations the Federal Reserve will raise interest rates in May.

Also bolstering the dollar was a report showing confidence among U.S. single-family homebuilders improved for a fourth straight month in April.

The , a measures of the currency against six major peers, rose 0.413% after the Empire State Manufacturing index shot to 10.8 from -24.6 in March, far higher than expectations of -18 in a Reuters poll of 35 economists.

The new orders index rose 47 points to 25.1, while the shipments index added 37 points to 23.9, substantial increases after they had declined in recent months, the New York Fed said.

“It’s the best reading since last July with a big jump in orders and has taken the dollar higher on this,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

“The economy still looks like it’s growing above what the Fed says is its speed limit,” he said. “The market is under-estimating chances of another hike after May. Now the market says the Fed is going to cut later, but I think that the economy is showing itself to be resilient.”

GRAPHIC: Empire State https://www.reuters.com/graphics/USA-STOCKS/zdvxdawervx/empirestate.png

Futures trading showed the probability of the Fed raising its lending rate to a range of 5.00%-5.25% when policymakers conclude a two-day meeting on May 3 rose to 88.7% from 78% on Friday, CME Group’s (NASDAQ:) FedWatch Tool showed.

Fed funds futures also showed that expectations the Fed will start cutting rates later this year were pushed back to November from September, with a smaller cut now anticipated.

The outlook of U.S. interest rates relative to the monetary policies and economies of other countries can boost or erode the dollar’s value.

The euro slid 0.66% to $1.0926 after hitting a one-year high of $1.108 on Friday. Traders expect further interest rate hikes from the European Central Bank as last month’s banking crisis fears have faded.

The yen weakened 0.45% at 134.40 per dollar as the Bank of Japan stuck to its easy-money policies, helping the greenback rise to its highest level since March 15.

“The dollar has bounced back but also we’ve had comments from the Bank of Japan indicating that there is no real reason for them to pull back from their ultra easy policy,” said Jane Foley, head of FX strategy at Rabobank.

New Bank of Japan Governor Kazuo Ueda last week made clear that the country would remain a “dovish” outlier by keeping interest rates at ultra-low levels for the time being.

GRAPHIC: Dollar hits one-month high against yen https://www.reuters.com/graphics/GLOBAL-FOREX/jnpwylzabpw/chart.png

Sterling was last trading at $1.2374, down 0.31% on the day.

The Mexican peso lost 0.11% versus the dollar to trade at 18.04, while the Canadian dollar fell 0.25% versus the greenback to 1.34 per dollar.

© Reuters. FILE PHOTO: A picture illustration shows U.S. 100-dollar bank notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – The dollar edged higher on Tuesday in choppy trading, with no clear direction, as investors kept an eye on debt ceiling talks to avert a possible default that could reverberate across asset markets and damage confidence in the world’s largest economy.

The , a measure of the greenback’s value against six major currencies, was up 0.2% on the day at 102.61. Against the yen, the greenback rose 0.2% to 136.315 yen

Democratic President Joe Biden and top congressional Republican Kevin McCarthy’s U.S. debt ceiling negotiations ended on Tuesday after less than an hour, as the looming fear of an unprecedented American debt default prompted Biden to cut short an upcoming Asia trip. But the meeting ended on an upbeat and unexpected note as McCarthy, coming out of the meeting with Biden and other congressional leaders, said, “It is possible to get a deal by the end of the week.”

Both parties agree on the need for urgent action.

“Clearly, to the extent that there is a default risk, it would be chaotic. The question is in a default, can you have Treasuries as collateral in a world that’s highly levered?” said Axel Merk, president and chief investment officer at Merk Investments in Palo Alto, California.

Historically speaking, the U.S. dollar tends to rally in times when there is financial stress and in periods of deleveraging as investors scramble to unwind risky bets.

“But you don’t want Treasury bills,” Merk said. “So it’s very difficult to suggest that we would have a dollar rally in that deleveraging. I would say it’s very hard to predict what will happen other than volatility might be dramatic.”

In afternoon trading, the euro slipped 0.1% versus the dollar to $1.0858, while sterling fell 0.4% to $1.2478.

The dollar earlier rose after U.S. retail sales rose less than expected in April, but details showed that the underlying trend remained solid. This suggested that consumer spending likely remained strong early in the second quarter.

Retail sales rose 0.4% last month. Data for March was revised slightly lower to show sales dropping 0.7% instead of 0.6% as previously reported.

In line with the generally upbeat economic picture, industrial production jumped 1% in April, easily topping expectations for a flat reading and up slightly from the revised 0.8% increase in March.

The reports suggested that while the market widely expects the Federal Reserve to pause increasing rates at the next meeting, a hike in borrowing costs was not off the table.

“While there were some mixed signals in today’s various data reports, on net most were favorable and early in the quarter we’re continuing to track some upside risk to our 1.0% 1Q GDP growth projection,” wrote Michael Feroli, chief U.S. economist at J.P. Morgan, in a research note.

“Even so, given all the dark clouds on the horizon, we continue to see the Fed on hold at the next meeting in mid-June.”

Richmond Federal Reserve President Thomas Barkin on Tuesday doubled down though on the higher-for-longer mantra. He said he likes the “optionality” implied in the central bank’s latest policy statement, but he is “comfortable” with raising interest rates further if that is what is needed to lower inflation.

That has been the message from several Fed officials over the last week.

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Currency bid prices at 3:54PM (1954 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 102.6200 102.4300 +0.20% -0.841% +102.6900 +102.1900

Euro/Dollar $1.0858 $1.0874 -0.14% +1.34% +$1.0905 +$1.0855

Dollar/Yen 136.3000 136.0950 +0.16% +3.97% +136.6750 +135.6800

Euro/Yen 147.99 148.01 -0.01% +5.48% +148.5000 +147.6200

Dollar/Swiss 0.8965 0.8956 +0.09% -3.05% +0.8970 +0.8920

Sterling/Dollar $1.2478 $1.2531 -0.42% +3.18% +$1.2546 +$1.2466

Dollar/Canadian 1.3481 1.3466 +0.13% -0.49% +1.3493 +1.3405

Aussie/Dollar $0.6653 $0.6700 -0.70% -2.40% +$0.6710 +$0.6651

Euro/Swiss 0.9734 0.9739 -0.05% -1.63% +0.9742 +0.9720

Euro/Sterling 0.8700 0.8678 +0.25% -1.63% +0.8718 +0.8680

NZ $0.6226 $0.6243 -0.14% -1.82% +$0.6260 +$0.6224

Dollar/Dollar

Dollar/Norway 10.7220 10.6000 +1.10% +9.20% +10.7370 +10.5930

Euro/Norway 11.6436 11.5214 +1.06% +10.96% +11.6725 +11.5195

Dollar/Sweden 10.4087 10.3480 +0.49% +0.01% +10.4251 +10.3188

Euro/Sweden 11.3008 11.2454 +0.49% +1.36% +11.3218 +11.2411

© Reuters. FILE PHOTO: An advertisement poster promoting China’s renminbi (RMB) or yuan , U.S. dollar and Euro exchange services is seen outside at foreign exchange store in Hong Kong, China August 13, 2015. REUTERS/Tyrone Siu

By Jamie McGeever

ORLANDO, Florida (Reuters) – faces significant long-term obstacles to becoming a global reserve currency of any great import, but the biggest challenge in the near term is the fact that nobody wants to buy Chinese bonds.

Foreign investors have been dumping Chinese bonds ever since Russia invaded Ukraine in February last year, wary that Beijing’s ties to Moscow could potentially expose overseas holders of Chinese assets to international sanctions.

The reversal was sudden – non-residents had poured money into Chinese debt securities almost every single month over the preceding decade – and so far, it has been sustained.

Figures through March this year compiled by macroeconomic data research firm Exante Data show that foreigners have been heavy sellers of Chinese bonds every month bar one since Russia invaded Ukraine.

“It is very hard to create a reserve currency, without attractive reserve assets. China has a problem. It wants foreigners to buy bonds but they have been selling since early 2022,” says Jens Nordvig, founder and CEO of Exante Data.

“Both the private sector and the official sector are reducing yuan exposure within their fixed income portfolios,” Nordvig adds.

Exante Data’s figures show foreign investors bought a net $558 billion of Chinese bonds between 2010 and 2021. From February last year through March this year they sold $115 billion.

DE-DOLLARIZATION?

The global ‘de-dollarization’ debate has found a new lease of life recently.

The dollar’s nominal share of global reserves is 58.35%, according to the International Monetary Fund’s currency composition of official foreign exchange reserves, or ‘Cofer’ data, the lowest since the euro’s launch in 1999.

Several countries, including Brazil and other major emerging economies in Asia and the Middle East, have called for trade in oil, commodities and other global goods to be invoiced in non-dollar currencies.

To be sure, the renminbi’s share of world FX reserves has more than doubled in the last seven years to 2.69%, according to the IMF’s Cofer data.

It has grown much faster than the yen, sterling, and currencies like the Australian and Canadian dollars and Swiss franc that are bundled together in the ‘others’ category in the Cofer data. But from a much lower base.

The nominal amount of global reserves held in renminbi was $298 billion at the end of last year, down from a peak of $337 billion 12 months earlier.

But in a pool of $12 trillion global reserves, of which nearly 80% is denominated in dollars and euros, these are very small numbers. There is a long way to go for the yuan to reach even the levels of sterling and the yen at 4.95% and 5.50%, respectively.

RESERVE STATUS

Any currency that has designs on attaining international reserve status must meet several criteria and fulfill several roles.

It should be widely accepted as a unit of reserve for central banks, an accounting unit for international trade, and a transaction currency for trading in global financial assets like equities and bonds.

Beijing has gradually allowed more institutions and central banks to enter the yuan-denominated bond market over the past two decades by relaxing rules around quotas, lock-up periods and registration requirements.

But as IIF economist Jonathan Fortun notes, it is a slow and uneven process, which will be made even slower and more uneven by the heavy selling of Chinese bonds recently.

“Any episode of large outflows concentrated in a single locale, as has been the case of China for much of last year, would be detrimental for a currency to achieve reserve status,” Fortun said.

The IIF’s capital flows data shows some minimal net inflows into China in recent months, but paints a broadly similar picture: demand for Chinese debt has evaporated.

Reluctance to own Chinese bonds comes amid growing pressure form Washington on its Group of Seven allies to impose restrictions on certain investments in China with national security implications. It didn’t make it into the final G7 communique, suggesting other G7 members are less enthusiastic.

But Washington is likely to keep pressing its allies to take a stand against what it considers Beijing’s use of “economic coercion” against other countries.

Beijing, in turn, could view this as the thin end of the wedge, effectively a call for companies, institutions and investors in some of the world’s richest nations to steer clear of China and allocate capital elsewhere.

Which is what bond investors, at least, are already doing.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by Simon Cameron-Moore)