Forex
Dollar slips to 5-month low as US inflation cools
© Reuters. FILE PHOTO: U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration
By Saqib Iqbal Ahmed
NEW YORK (Reuters) -The edged down on Friday, hitting a near five-month low as data showed annual U.S. inflation slowed further below 3% in November, cementing market expectations for a U.S. interest rate cut next March.
In the 12 months through November, inflation, as measured by the personal consumption expenditures (PCE) price index, stood at 2.6%, easing from 2.9% in October.
Excluding the volatile food and energy components, the so-called core PCE price index advanced 3.2% year-on-year in November, the smallest rise since April 2021. The Federal Reserve tracks the PCE price measures for its 2% inflation target.
“The market will view the data as very much adding weight to the Fed’s recent tilt towards an easier monetary stance,” said Stuart Cole, chief macro economist at Equiti Capital.
“This is the Fed’s preferred measure of inflationary pressures, so if you take into account the fact that some of the effect of the tightening delivered to date is still to be felt, then I think the FOMC may well be starting to privately feel that it’s job done as regards getting inflation back under control,” he said.
The dollar has come under selling pressure after last week’s Federal Reserve meeting prompted traders to pencil in several rate cuts in 2024, starting as early as March. U.S. Federal Reserve officials have since been pushing back on the idea of rapid rate cuts next year.
The dollar index was last down 0.08% at 101.7, after dipping as low as 101.42, its lowest since late July.
The index is on pace to finish the year down about 2%.
The Federal Reserve’s dovish December pivot has boosted the case for the dollar to keep falling into 2024, though strength in the U.S. economy could limit the greenback’s decline.
“The Fed has moved to the front of the pack of the major central banks in terms of when the first interest rate cut will be delivered and this is exposing the USD to an interest rate differential that is working against it,” Equiti Capital’s Cole said.
On Friday, the dollar weakened to a near nine-year low against the Swiss franc and was last down 0.02%, back to January 2015 levels when the Swiss National Bank sparked significant volatility by discontinuing its policy of having a minimum exchange rate for the franc against the euro.
The euro was up 0.02%. The European Central Bank will need at least until spring before it can reassess its policy outlook and market expectations for an interest rate cut in March or April are premature, ECB policymaker Bostjan Vasle said on Monday.
Sterling gained 0.09% to $1.2703 as traders digested data that showed British retail sales in November jumped by much more than expected, but third-quarter GDP was revised lower.
The dollar edged higher against the yen last up 0.25% at 142.465 yen, after data showed Japan’s core inflation slowed sharply in November to a pace unseen in over a year, highlighting easing cost-push pressures that may give the central bank more time before phasing out its massive monetary stimulus.
The BOJ had, earlier this week, maintained its ultra-loose policy settings and offered few hints on when it could move away from negative interest rates.
The risk-sensitive Australian and New Zealand dollars traded higher on the day. The was last up -0.04% at $0.68, earlier having touched $0.6825, its highest since July. The traded up 0.07% at $0.62985, also a five-month high.
In cryptocurrencies, bitcoin slipped 0.34% to $43,726, just shy of the 8-month high of $44,729 hit earlier this month.. A spate of filings for spot bitcoin and ether ETFs, including from traditional finance heavyweights, has helped revive the crypto market this year after a series of meltdowns in 2022.
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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