News, insights and analysis from the global FX markets
USD: US dollar tops the global currency charts in May
May saw the US dollar (USD) become the top-performing currency across the board. The US Dollar Index (DXY) – a measure of the value of the USD against a basket of currencies – recovered to 104.5, with the USD rising over 2.8%.
This is driven by two main factors: the ongoing US debt-ceiling negotiations, which are hurting overall risk sentiment, and an increased chance of another interest rate hike in June.
While the market’s current expectation is leaning towards “no-hike” for June, the actual decision can still go either way given the difference of views at May’s Federal Open Market Committee (FOMC) meeting.
If the employment market remains resilient and inflation doesn’t cool down, the US Federal Reserve will have sufficient support for another interest rate hike in June.
EUR: Economic uncertainty across Eurozone weighs on Euro outlook
In the last update, we anticipated an interest rate hike of 25 basis points (0.25%) by the European Central Bank (ECB) in May. Not only did this occur, but the ECB hinted that another interest rate rise is likely to follow in June.
In fact, Klaas Knot, President of De Nederlandsche Bank and a member of the ECB’s Risk Board, said that he wants the ECB to continue increasing interest rates into the summer.
Despite the likelihood of further rate hikes, the outlook for the EUR might not be as bright. The ECB will find it increasingly difficult to strike a balance in its monetary policy due to different inflation rates throughout the Eurozone.
Furthermore, with Germany, the economic engine of the Eurozone, officially in recession, any further rate likes will likely hurt some Eurozone economies – and the EUR – even further.
Looking ahead, businesses buying or selling to countries outside of the Eurozone should monitor any foreign exchange fluctuations. In some cases, it may be beneficial to lock in your currency rates to gain a degree of certainty.
GBP: Sterling performs well but inflation remains high
The British pound (GBP) performed well in May against other currencies. It rose to a six-month high against the Euro (EUR) to 1.16, while GBPUSD reached a yearly high before dropping to around 1.24. GBPNOK, GBPSEK and GBPZAR also reach near-all-time highs.
The most recent Bank of England (BoE) meeting saw interest rates increase by 0.25% to 4.5% – the highest level since October 2008. Inflation remains significantly higher than the BoE’s 2% target. With food prices in particular remaining stubbornly high, inflation will continue to be high on the agenda for consumers, businesses and policymakers.
CNY: Mixed economic data accelerates Chinese renminbi’s depreciation
The Chinese renminbi (CNY) broke through a key level of 7.0 and depreciated by more than 2.8% against the US dollar (USD), making it one of the worst performers in May.
The USD’s broad appreciation, fuelled by expectations of another interest rate hike in June, is only half the story. Worse-than-expected data released in May showed that the Chinese post-Covid economic recovery hasn’t been as strong as anticipated.
Not only did inflation metrics miss analyst forecasts, but core statistics signalling the strength of domestic consumption – such as retail sales and imports – also fell short of market expectations.
Due to the reasons above, the market has been anticipating a loosening of monetary policy by the central bank to stimulate and support the economy. Against expectations, however, the People’s Bank of China (PBOC) decided to keep the rate unchanged in May contributing to the renminbi’s depreciation.
MYR: Oil price falls push Malaysian ringgit to new lows
A weaker economic outlook for China and a significant 40% drop in oil prices since its peak in 2022 have led to the Malaysian ringgit (MYR) slipping to fresh new lows against the US dollar.
This has affected Malaysia’s trade balance, as export growth in April experienced the sharpest decline in three years. Economists believe the MYR may continue to lose value and hit USD/MYR 5 in the medium term. This is great news for businesses importing from Malaysia.
JPY: BoJ outlines flexible monetary policy outlook
The Japanese yen (JPY) continues to weaken against the US dollar. It surpassed the 140 mark for the first time since November 2022, taking the total depreciation for the year to 6.2%. This reflects the contrasting views on monetary policy between Japan and the US.
Kazuo Ueda, Governor of the Bank of Japan (BoJ), expressed the importance of maintaining policy flexibility by minimising the significance of wages or any specific economic data. He also kept open the possibility of policy adjustments, even if inflation remains below 2%.
AUD: Unexpected RBA rate rise takes market by surprise
The AUDUSD rose above 0.6800 in the first ten days of May. This was largely driven by the Reserve Bank of Australia’s (RBA) decision to raise interest rates by 25 basis points (0.25%) to 3.85%.
The decision came as a surprise, especially as a significant majority of economists expected the status quo to remain.
However, the gains were short-lived as risk aversion took over the second half of May. The Australian dollar (AUD) later dropped back to 0.6498, a level last seen in November 2022, due to disappointing domestic data relating to unemployment, wages and retail sales.
The AUD also took a hit as economic data from China, Australia’s biggest trade partner, missed expectations, suggesting that growth is slowing down.
NZD: New Zealand dollar tumbles as end to rate rises expected
The Reserve Bank of New Zealand (RBNZ) announced a 25 basis points (0.25%) hike in interest rates to 5.50%, the highest level since 2008. However, the New Zealand dollar (NZD) tumbled by more than 1% from highs of 0.6379 after the RBNZ signalled an end to its streak of 12 interest rate hikes in a row.
The end to this aggressive monetary policy is on the back of what would be welcoming news for consumers and businesses, as inflation is expected to drop from 3.30% to 2.79% for the second quarter of the year.
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