Forex
Dollar falls, euro highest since August in thin holiday trading
© Reuters. FILE PHOTO: U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
By Karen Brettell
NEW YORK (Reuters) -The fell on Tuesday and the euro hit a more than four-month high as investors waited on fresh clues to when the Federal Reserve is likely to begin cutting interest rates as inflation falls closer to the U.S. central bank’s 2% annual target.
Volumes were muted the day after Christmas, however, as markets in the UK, Australia, New Zealand and Hong Kong, among others, were still out for a public holiday. Many traders globally are also out for holidays until the New Year.
The greenback is on track to post its worst performance since 2020 against a basket of currencies as anticipation of Fed rate cuts dents the appeal of the U.S. currency relative to peers.
Many analysts expect the U.S. economy to markedly slow in 2024, but the Fed is also expected to act to ensure that the gap between the fed funds rate and realized inflation doesn’t widen too far.
If inflation falls much faster than the Fed’s benchmark rate it can tighten monetary conditions more than Fed policymakers intend and increase the risk of a hard economic landing.
“Inflation should continue to cool, which will afford policymakers the ability to trim rates by June in order to prevent passive tightening in real rates,” analysts at Action Economics noted in a report on Tuesday.
However they pushed back against a cut coming as soon as March and disagreed with market pricing of 154 bps in easing by December, noting that this is “unlikely to be necessary unless the economy were to fall into a recession in coming months.”
Data on Friday showed U.S. prices fell in November for the first in more than 3-1/2 years, pushing the annual increase in inflation further below 3%.
Annual home prices in October rose again, pointing toward continued recovery of the housing market, data on Tuesday showed. Separately a Mastercard (NYSE:) report showed U.S. retail sales rose 3.1% between Nov. 1 and Dec. 24 as shoppers looked for last-minute Christmas deals amid big promotions.
The dollar index was last down 0.18% on the day at 101.44. It has fallen from a 20-year high of 114.78 on Sept. 28 2022 and is pace for a yearly loss of 1.98%.
The euro was up 0.20% at $1.1045, the highest since Aug. 10. The single currency has risen from a 20-year low of $0.9528 on Sept. 26, 2022 and is on track for a 3.08% gain this year.
The dollar gained 0.06% against the yen to 142.47. The dollar reached a 32-year high of 151.94 yen on Oct. 24, 2022, and came close to reaching this level again last month, before the Japanese currency recovered. The dollar is on pace for a 8.68% gain this year.
The yen has steadied near a recent five-month peak on the view that the Bank of Japan (BOJ) could soon mark an end to its ultra-easy policy. For most of 2022 and 2023, the policy has kept the Japanese currency under pressure as other major central banks embarked on aggressive rate-hike cycles.
BOJ Governor Kazuo Ueda said on Monday the likelihood of achieving the central bank’s inflation target was “gradually rising” and it would consider changing policy if prospects of sustainably achieving the 2% target increase “sufficiently”.
In cryptocurrencies, fell 3.36% to $42,130.
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Currency bid prices at 3:00PM (2000 GMT)
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
Previous Change
Session
Dollar index 101.4400 101.6400 -0.18% -1.981% +101.7700 +101.4500
Euro/Dollar $1.1045 $1.1015 +0.20% +3.08% +$1.1045 +$1.1010
Dollar/Yen 142.4700 142.4050 +0.06% +8.68% +142.6250 +142.0900
Euro/Yen 157.35 156.85 +0.32% +12.15% +157.3600 +156.5900
Dollar/Swiss 0.8532 0.8555 -0.27% -7.73% +0.8579 +0.8532
Sterling/Dollar $1.2722 $1.2699 +0.10% +5.16% +$1.2723 +$1.2689
Dollar/Canadian 1.3203 1.3268 -0.41% -2.56% +1.3262 +1.3202
Aussie/Dollar $0.6824 $0.6799 +0.24% +0.12% +$0.6824 +$0.6799
Euro/Swiss 0.9422 0.9423 -0.01% -4.78% +0.9448 +0.9419
Euro/Sterling 0.8679 0.8672 +0.08% -1.87% +0.8686 +0.8669
NZ $0.6331 $0.6298 +0.36% -0.29% +$0.6332 +$0.6295
Dollar/Dollar
Dollar/Norway 10.1360 10.2120 -0.57% +3.46% +10.2710 +10.1540
Euro/Norway 11.1980 11.2303 -0.29% +6.71% +11.3130 +11.2010
Dollar/Sweden 9.9919 10.0179 +0.17% -4.00% +10.0734 +9.9848
Euro/Sweden 11.0360 11.0175 +0.17% -1.02% +11.0935 +11.0100
Bank of America reported that investors had broadly sold off the US dollar last week, influenced by slightly positive economic indicators from the United States. The movement came in response to somewhat encouraging US inflation data and softer-than-expected retail sales figures.
According to the Bank of America, the sell-off of the US dollar was widespread, with real money investors now holding a slightly short position on the currency. Despite this trend, hedge funds’ long positions on the US dollar are still near the highest levels seen in the past five years.
In the foreign exchange markets, the Australian dollar (AUD) saw increased interest, with investors continuing to build their long positions. Conversely, short positions in the Swedish krona (SEK) and the New Zealand dollar (NZD) experienced a slight reduction.
Emerging market currencies also attracted attention, with buying activity focused particularly on regions such as Europe, the Middle East, and Africa (EMEA), as well as Asia. The Turkish lira (TRY) was highlighted as a currency where both hedge funds and emerging market investors increased their buying across the board.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
By Stefano Rebaudo
(Reuters) -The dollar struggled for direction on Tuesday as investors stuck to their views for the expected timing of Federal Reserve monetary easing this year.
Ether was set for its largest two-day gain in nearly two years and bitcoin approached a record high on speculation about the outcome of applications for U.S. spot exchange-traded funds that would track the world’s second-biggest cryptocurrency.
The euro rose 0.12% to $1.0869.
Investors are awaiting Thursday’s data from the European Central Bank (ECB) negotiated wage tracker and the euro zone Purchasing Managers’ Index (PMI) which could provide further clues about the monetary cycle in the euro area.
Meanwhile, with little on the U.S. economic data calendar this week to guide the direction of the dollar, investors’ focus is turning to a slew of Federal Reserve speakers.
Several officials on Monday called for continued policy caution, even after data last week showed an easing in consumer price pressures in April.
Money markets are now pricing in 42 basis points (bps) of Fed rate cuts in 2024 — implying one 25 bps reduction and a 68% chance of a second move by December — from fully pricing in two cuts before recent hawkish comments from central bank officials.
They are betting on 63 bps of ECB rate cuts in 2024 from around 73 bps in mid-May.
Some analysts highlighted that Atlanta Fed President Raphael Bostic made dollar-positive remarks when he cautioned that the Fed’s benchmark rate would likely end up at a higher steady rate than in the past decade.
“We expect the dollar to weaken after the first rate cut (by the Fed), which markets now price in September, but we also see the risk of a delay in the monetary easing with the Fed making the first move in December,” said Athanasios Vamvakidis, global head of forex strategy at BofA.
Against a basket of currencies, the dollar dropped 0.08% at 104.52.
“We see risks towards far greater divergence favouring the Fed,” argued George Saravelos, global head of forex research at Deutsche Bank, after noting remarkable symmetry in monetary policy that is still priced in by markets.
“Combined with the status of high-yielding currency, this provides a powerful underpinning to USD strength,” he added.
On the data front, the focus will now be on the Personal Consumption Expenditures (PCE) price index report – the Fed’s preferred gauge of inflation – due on May 31.
In the cryptoverse, ether jumped 6.2% to $3.715.60 after hitting $3,730.70, its highest level since March 16. It surged nearly 14% in the previous session – its largest daily percentage gain since November 2022.
broke above the $70,000 level and was last trading 2% higher at $71,128. It hit its all-time high at $73,803.25 in March.
The jump in cryptocurrencies also has “to do with that core (U.S.) inflation data last week that’s boosted risk sentiment and obviously brought rate cuts back into play,” said Tony Sycamore, a market analyst at IG.
Against the yen, the dollar dropped 0.06% to 156.20, not far from its lowest in over 30 years at around 160.
Fears of intervention from Japanese authorities deterred traders from pushing the yen to new lows. However, the still-stark interest rate differentials between the U.S. and Japan maintained the appeal of the yen as a funding currency.
“Forex interventions can buy some time and temporarily avoid an excessive depreciation of the yen, but if the Fed starts cutting later than the markets currently expect, it can become challenging for Japanese authorities to keep the yen below certain levels,” BofA’s Vamvakidis argued.
The Canadian dollar was flat at $1.3627 ahead of inflation data later in the session.
“We have called for a Bank of Canada (BoC) rate cut in June for the past couple of months, and are expecting that to make the increasingly less attractive compared to other commodity currencies,” said Francesco Pesole strategist at ING.
The BoC would be willing to cut interest rates three times ahead of the Fed first move, according to a Reuters poll.
The New Zealand dollar fell 0.03% to $0.6103, before the Reserve Bank of New Zealand policy meeting which is expected to hold its key interest rate at 5.50% on Wednesday.
Bank of America (BofA) analysts provided insights into currency market trends, noting a significant rally in the pair last week. The surge was attributed to a subdued US Consumer Price Index (CPI) report. BofA’s signals indicate that the upward trend for the euro against the US dollar is likely to continue.
The bank’s analysis pointed to option flows that show a sustained demand for USD puts, suggesting that investors are betting on a weaker dollar. Additionally, BofA’s technical matrix revealed signals of a continuing downtrend for the USD when compared to major currencies such as the euro (EUR), the British pound (GBP), and the New Zealand dollar (NZD).
Despite the positive trend for the EURUSD, BofA cautioned that the momentum seen in the risk rally might not be as strong moving forward. The analysts observed that the (DXY), which measures the dollar’s strength against a basket of currencies, managed to close above its 200-day Simple Moving Average (SMA), an indication of a potential slowing in the dollar’s decline.
Furthermore, BofA’s economists have noted an absence of significant market-moving events from US economic data expected this week. Without new bearish catalysts for the USD, the currency’s downtrend might not maintain the same pace as observed last week.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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