Central Banks Expect to Reduce Dollar Exposure: OMFIF Survey — Market Talk

1046 GMT - Central banks are diversifying reserves gradually away from the dollar, according to the Official Monetary and Financial Institutions Forum's Global Public Investor survey. The dollar continues to dominate portfolios and is still considered unmatched for safety and liquidity but central banks increasingly expect to reduce their exposure to the currency over the short and long term, especially in emerging markets. For the first time since the survey began recording reserve managers' long-term intentions in 2023, more central banks plan to decrease their dollar holdings than increase over the next 10 years. The euro and renminbi remain the main alternatives. However, the euro lacks a single, deep, safe asset market while the renminbi remains constrained by market structure and geopolitical concerns. (renae.dyer@wsj.com)

1043 GMT - Sterling could fall moderately against the euro as the Bank of England is likely to avoid lifting interest rates this year while U.K. political uncertainty remains elevated, Rabobank's Jane Foley says in a note. The BOE would only vote to raise rates if there is clear evidence that another period of prolonged high energy prices is generating second round inflation effects, she says. Meanwhile, the U.K.'s potential next prime minister, Andy Burnham, said he would stick to the fiscal rules but his plans were vague regarding funding. Political uncertainty can hurt business confidence, investment and growth, she says. The euro trades flat at 0.8610 pounds and Rabobank expects it to reach 0.87 on a one- to three-month view. (renae.dyer@wsj.com)

1040 GMT - The Polish zloty falls to a 16-week low against the euro after data showed Poland's inflation eased in June to its lowest level since the start of the Iran war. Inflation decelerated to 2.5% in June from 3.1% in May. The data support expectations that Poland's central bank could refrain from raising interest rates. Markets priced out rate rises after surprisingly lower inflation in May and relief from the fall in oil prices, ING's Frantisek Taborsky says in a note. The central bank has also been quick to dismiss any discussion of rate rises. This has negative implications for the zloty, he says. The euro rises to as high as 4.3004 zloty.(renae.dyer@wsj.com)

1039 GMT - U.S. Treasury yields fall in European trade, reflecting lower oil prices, while the dollar rises on continued expectations of Federal Reserve rate hikes. "Strong U.S. economic data and persistent inflation concerns have reinforced expectations that the Federal Reserve could tighten monetary policy, supporting the dollar," FXEM's Abdelaziz Albogdady in a note. Markets continue to price in a 25 basis-point Fed rate increase by the end of the year, providing support despite occasional pullbacks in bond yields, the market research and fintech strategy manager says. The DXY dollar index is up 0.25% at 101.362. The 10-year U.S. Treasury yield falls 0.7 basis points to 4.365%, according to Tradeweb. (emese.bartha@wsj.com)

1034 GMT - Japanese authorities could hold off on interventions to shore up the yen until Friday's U.S.-holiday thinned market conditions, ING's Chris Turner says in a note. Moreover, the market will have had the chance to react to comments from Federal Reserve Chair Kevin Warsh on Wednesday and the U.S. nonfarm payrolls report on Thursday. There's also a chance Japan holds out until shortly before the next Japanese public holiday on July 20, he says. Nonetheless, interventions can only slow rather than reverse the yen's fall, he says. A reversal would require some "dramatic" Bank of Japan rate hikes and a weaker dollar. The dollar rises 0.2% to 162.30 yen, having reached a 40-year high of 162.41 earlier, LSEG data show. (renae.dyer@wsj.com)

1029 GMT - The cost of default protection for euro-denominated high-yield credit falls to its lowest since Feb. 18, due to optimism around a lasting resolution to the Middle East conflict. Markets are pricing in prospects of de-escalation in the U.S.-Iran war ahead of possible negotiations in Doha, IG analysts say in a note. The iTraxx Europe Crossover index of euro high-yield credit default swaps falls 2 basis points to 245bps, S&P Global Market Intelligence data show. (miriam.mukuru@wsj.com)

1026 GMT - Singapore's 2026 GDP growth print is likely to beat the official projection, Maybank economists say in a report. The city-state's economy and inflation have been little affected by the Middle East conflict. The global artificial-intelligence capital expenditure and construction boom is cushioning the impact of higher energy prices and Gulf-related supply disruptions. The financial sector has also seen safe-haven flows for foreign currency and Singapore dollar deposits, supporting loan growth and banking liquidity. Maybank expects the economy to expand 4.6% this year, above the Ministry of Trade and Industry's forecast of 2% to 4% growth. (amanda.lee@wsj.com)

1023 GMT - The Reserve Bank of India is likely to deliver 75 bps of rate hikes to lift the repo rate to 6.00% by early 2027, Shilan Shah of Capital Economics writes in a note. The energy shock has weighed on India's economy but growth should still average 6.5% for fiscal year 2027, Shah says. Rainfall in the early stages of the monsoon has been weak, and if this remains the case it would raise upside inflation risks, Shah adds. Meanwhile, the rupee remains close to a record low against the U.S. dollar despite the fall in oil prices and RBI currency stabilization measures in June, Shah writes. Rising inflation and continued currency concerns may force the RBI to raise interest rates soon, Shah says. (kimberley.kao@wsj.com)

1016 GMT - The Indian rupee remains under pressure, says Dilip Parmar, research analyst at HDFC Securities. Persistent safe-haven flows into the U.S. dollar and strong corporate dollar demand continues to weigh on the rupee, Parmar says. Broader risk-off sentiment across global markets also continues to weigh on the rupee, Parmar adds. From a technical standpoint, the dollar-rupee pair faces immediate resistance at 95.10, with support at 94.40, Parmar says. The dollar was last 0.1% higher at 94.66 rupees. (kimberley.kao@wsj.com)

0957 GMT - Building evidence over the economic fallout from the energy price shock in the eurozone has put the euro under increased selling pressure, MUFG Bank's Lee Hardman says in a note. Eurozone economic data have been worse than expected on balance since April, encouraging market participants to scale back European Central Bank rate-rise expectations, he says. Softer growth remains a headwind for the euro in the near-term, although if energy prices stabilize at lower levels it will encourage an economic recovery later this year and support the currency, he says. The euro falls 0.2% to $1.1395, having reached a one-year low of $1.1324 last Wednesday, LSEG data show. (renae.dyer@wsj.com)

0954 GMT - Global air passenger demand fell 2.2% in May due to the war in the Middle East, the International Air Transport Association says. Demand was lead by Africa, and Latin America and Caribbean, where numbers grew 6.6% and 6.1% respectively as measured in revenue passenger kilometers. However, Middle East passenger demand fell 28.4% in the month but improved compared with April's 46.6% drop. Demand in Asia-Pacific was down 1.4%, but up 2.7% in Europe, the industry body says. "While the recent sharp drop in oil prices is an encouraging development, the challenges created by the war will likely persist for some time," IATA's Director General Willie Walsh says. (ian.walker@wsj.com)

0946 GMT - U.K. politics remain the biggest and most unpredictable, immediate risk to sterling, Monex Europe analysts say in a note. Andy Burnham, the frontrunner to replace U.K. Prime Minister Keir Starmer who announced his resignation last week, pledged fiscal discipline on Monday. While the comments lifted sterling, it flatters a "fragile picture," the analysts say. Replacing Starmer doesn't resolve the U.K.'s underlying fiscal challenges while Burnham's speech offered little on policy detail, they say. "We see little reason to abandon our bias toward modest sterling downside." The euro trades flat at 0.8610 pounds after reaching a near one-week low earlier, according to LSEG. Sterling falls 0.2% to $1.3235 after hitting a one-week high of $1.3262 Monday.(renae.dyer@wsj.com)