Forex
Dollar muted in thin trading; retail sales to drive rate cut expectations
© Reuters.
Investing.com – The U.S. dollar traded in a muted fashion in early European trade Monday, with a U.S. holiday limiting activity as traders consider the chances of early rate cuts by the Federal Reserve.
At 04:35 ET (09:35 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 102.242, at the start of the Martin Luther King Jr. Day holiday.
Dollar faces quiet week
U.S. unexpectedly fell in December, according to data released Friday, prompting traders to increase their bets that the will start cutting interest rates early this year.
Market pricing now points to a 78% chance that the U.S. central bank will begin easing rates in March, as compared to a 68% chance a week ago, according to the CME FedWatch tool.
The U.S. data calendar is pretty quiet this week, with the main focus being Wednesday’s . This will be closely watched for indications that consumer spending – a major driver of economic growth – is remaining resilient in the face of elevated interest rates.
Retail sales are expected to have risen 0.4% in December, after a 0.3% increase in November.
“We suspect that the data may prove insufficient to trigger a USD rebound for now; the consensus view of a dollar decline later this year seems to be making investors keen to sell dollar rallies,” said analysts at ING, in a note.
Investors will also have the chance to hear from several Fed officials including Fed Governor as well as Atlanta Fed President and San Francisco Fed head .
Euro edges higher despite German GDP contraction
In Europe, edged higher to 1.0953, despite showing the German economy, the largest in the eurozone, contracted by 0.3% in the final quarter of last year and shrank by the same amount over the full-year 2023.
“Overall economic development faltered in Germany in 2023 in an environment that continues to be marked by multiple crises”, said Ruth Brand, president of the Federal Statistics Office earlier Monday.
Still, despite this weakness, recent inflation data broadly confirmed current thinking at the European Central Bank, meaning interest rate cuts are not a near-term topic of debate, chief ECB economist Philip Lane said on Friday.
rose to 2.9% in December, from 2.4% in November.
fell 0.1% to 1.2738 ahead of a busy week for U.K. economic data, including numbers on Tuesday, on Wednesday and on Friday.
“Services inflation is what matters the most for the Bank of England at the current stage and we expect to see it at 6.1% this week, considerably below the Bank of England’s estimates. Despite the improvement in services disinflation, 6%+ remains too high and is unlikely to make the BoE endorse dovish rate expectations just yet,” added ING.
Yuan slips slightly after PBOC stays on hold
In Asia, rose 0.1% to 7.1735, with the yuan retreating after the People’s Bank of China unexpectedly kept medium-term lending rates unchanged, suggesting the PBOC has limited headroom to loosen monetary policy further and support the Chinese economy.
Fourth-quarter data, due on Wednesday, is expected to show that the Chinese economy grew more than the government’s 5% target for 2023. But the growth also comes from a low base for comparison from 2022.
traded 0.4% higher to 145.51, with the yen suffering from persistent bets that the Bank of Japan will largely maintain its ultra-dovish policy when it meets later this month.
Japanese data, due later this week, is expected to show a sustained decline in inflation.
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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