Dollar Extends Gains as China's Stimulus Falls Short | Forex Market Update

Dollar Gains Amid China's Stimulus Disappointment as Japan Holiday Saps Liquidity

The U.S. dollar extended its upward trend in early Monday trades across Asia, buoyed by reduced liquidity due to a public holiday in Japan. Market focus shifted toward China’s lackluster weekend stimulus announcements, which left investors unsatisfied.

The euro dipped 0.13% to $1.0922, while the British pound fell nearly 0.2% to $1.3043. The dollar held steady against the Japanese yen at 149.20, reflecting the cautious mood of global markets.

The U.S. dollar index hovered at 103.10, inching closer to last week's high, its strongest level since mid-August. This rise was fueled by traders cutting back expectations of further significant interest rate cuts by the Federal Reserve at upcoming meetings.

Yuan and Aussie Dollar Decline Amid China Concerns

Ahead of China’s onshore market opening, the Chinese yuan weakened more than 0.2% against the dollar. The Australian dollar, closely linked to China’s economic performance, dropped 0.16%, trading at $0.67385.

China announced on Saturday that it would "significantly increase" government debt issuance to provide subsidies for low-income individuals, support the property market, and bolster state bank capital in an attempt to reignite slowing economic growth. However, the lack of concrete details regarding the size of the fiscal stimulus left markets unimpressed.

Analysts Remain Skeptical About China's Policy

Richard Franulovich, head of FX strategy at Westpac, commented, "Markets are likely disappointed that China's Finance Ministry did not unveil concrete additional stimulus." He added that the announcement aligns with previous expectations and may only provide a temporary boost to the Australian dollar, of which half the benefit has already been priced in.

Further policy actions may be delayed until China addresses deeper issues, such as excess housing, local government debt, and aging demographics. These structural challenges remain significant obstacles to long-term economic recovery.

China's Stimulus Measures Struggle to Boost Investor Confidence

The yuan has fallen 0.9% against the dollar since September 24, when the People’s Bank of China introduced aggressive stimulus measures, the most significant since the pandemic. Although China’s CSI300 Index initially surged by 16%, recent market sentiment has turned cautious as investors question whether the stimulus efforts will be sufficient to sustain growth.

Currency strategist Christopher Wong from OCBC in Singapore noted, "More time may be needed for thoughtful and targeted measures. However, delays could result in market disappointment if expectations continue to outpace actual policy delivery."

Global Currency Movements Remain Subdued

Last week, major currencies experienced limited movement. The Japanese yen and euro each dropped around 0.3%, sterling fell 0.4%, and the U.S. dollar index climbed 0.4%.

Investors are closely monitoring upcoming U.S. economic data, including retail sales and jobless claims, set for release on Thursday. These reports could provide insight into whether the Federal Reserve will proceed with the anticipated 25-basis point rate cuts in November and December.

Fed Governor's Remarks Expected

Later on Monday, Fed Governor Christopher Waller is set to speak, with markets paying close attention. Waller has recently advocated for a more substantial rate cut, citing concerns that inflation may be undershooting the Fed's target.

Other Global Markets React

In other news, the New Zealand dollar dipped 0.15% to $0.61, continuing a decline from last week’s 0.8% fall. This came after the Reserve Bank of New Zealand slashed interest rates by 50 basis points and signaled the potential for more cuts.

Meanwhile, Singapore's central bank opted to maintain its currency-based monetary policy, offering little in the way of surprises for regional markets.