Forex
Dollar softens, sterling squeezed as focus turns to U.S. inflation
© Reuters. FILE PHOTO: U.S. Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
By Samuel Indyk and Tom Westbrook
LONDON (Reuters) -The dollar dipped on Thursday while sterling crosses were nursing losses in holiday-thinned trade ahead of the last major data release of the year in Friday’s U.S. inflation figures.
Sterling suffered its sharpest drop on the dollar in two months on Wednesday after British inflation dived below forecasts to an annual 3.9% in October, a two-year low.
The currency fell 0.7% to $1.2638 as traders priced in Bank of England rate cuts as soon as May. On Thursday it hit a one-week low of $1.2613, before recovering slightly as the dollar softened. It was last at $1.2669.
Against the euro the pound hit its weakest in more than three weeks at 86.78 pence, while it was also lower against the and yen. [GBP/]
Analysts are forecasting a similar easing for Friday’s U.S. core personal consumption expenditure (PCE) data, with the annual inflation rate seen slowing to its lowest since 2021 at 3.3%.
The , which measures the currency against six other including the pound, was down 0.4% at 102.01.
“Broadly speaking the market is happy to run with this Goldilocks-type soft landing scenario, which tends to lead to the dollar softening,” said Dominic Bunning, head of European FX research at HSBC.
“Even if we don’t necessarily buy into that in the medium term, in the short term it’s hard to fight it.”
Some analysts said month-end rebalancing in thin trade was also driving the dollar lower.
“US equity market outperformance through December rather suggests that passive hedge rebalancing flows will run against the USD through month end,” said Shaun Osborne, chief FX strategist at Scotiabank.
“While markets look relatively calm and trade flows appear to be thinning out, there may still be motivation to push spot rates around after all.”
Heavy selling in the final hour of equities trade on Wall Street on Wednesday had also sent a ripple of risk-aversion through markets, even as stock futures steadied.
The mood helped the safe-haven yen along with Japan lifting its growth projection for the fiscal year to 1.6%.
The yen rose about 0.6% and last traded at 142.725 per dollar.
It has still lost more than 8% on the dollar this year as the Bank of Japan has steadfastly kept short-term rates negative, against 300 basis points of U.S. interest rate hikes.
Analysts at Goldman Sachs said that markets should take note of the BoJ retaining its easing bias at the last meeting.
“Market pricing for action early next year is still too aggressive, especially when considering how widespread the disinflation narrative has become,” Goldman Sachs analysts said in a note.
“This is just one of the reasons why we think there is still limited scope for substantial yen appreciation.”
The euro was up 0.4% at $1.0986.
The Australian and New Zealand dollars traded just below Wednesday’s five-month highs. The Aussie was last at $0.6759, having touched its highest since July at $0.6779 a day earlier. The traded at $0.6262. [AUD/]
was steady as funding costs fell and China’s blue-chip stock index hovered near five-year lows. It was last at 7.14 to the dollar. [CNY/]
leapt back above $44,000 and was up at $44.171, just below last week’s 20-month high of $44,729.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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