Forex
Dollar jumps to one-month high as rate-cut bets fall
© Reuters. U.S. Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
By Harry Robertson and Ankur Banerjee
LONDON/SINGAPORE (Reuters) -The dollar rallied on Tuesday as investors tempered their expectations for a March rate cut from the Federal Reserve, while the pound and yen dropped as inflationary pressures subsided.
Against a basket of currencies, the dollar rose 0.51%to 103.16, around a one-month high. It gained 0.2% overnight in subdued trading during a U.S. public holiday on Monday.
The euro fell 0.54% to $1.0892, set for its steepest one-day percentage drop in two weeks.
Comments from European Central Bank officials downplaying the idea of early rate cuts overshadowed the outlook for borrowing costs globally.
The ECB’s Joachim Nagel on Monday said it was too early to talk about cuts, and his Austrian colleague Robert Holzmann said markets should not bank on borrowing costs falling this year. Other policymakers on Tuesday maintained a cloud of uncertainty over the timing of the moves.
“The hawkish ECB commentaries last night have fuelled concerns that market pricing for the Fed rate path may also be aggressive,” said Charu Chanana, head of currency strategy at Saxo in Singapore.
“Some safe-haven demand also likely to be at play with Red Sea disruptions escalating.”
U.S. bond yields rose on Tuesday after Monday’s holiday, with the 10-year up 6 basis points at 4.011%, supporting the dollar.
Jane Foley, head of FX strategy at Rabobank, said a bleak outlook for Germany’s economy, which shrank 0.3% last year, was likely another factor weighing on the euro.
“With budget cuts coming, it doesn’t look good for the German economy in terms of growth for the year ahead,” she said.
ECB data on Tuesday showed consumer expectations of euro zone inflation three years ahead fell sharply in a November poll to 2.2%, from 2.5%.
STERLING AND YEN FALL
Sterling was last down 0.71% at $1.2637 after data showed British wage growth slowed sharply in the three months through November, supporting the idea that the Bank of England will cut rates heavily this year.
The dollar was 0.58% higher against the Japanese yen, at 146.65 yen to the dollar, around a five-week high. The yen fell after figures showed Japan’s wholesale price index stayed flat in December from a year ago, with the rate of change slowing for the 12th straight month.
The Australian dollar, which tends to fall when investors are worried about taking on risk in the market, was down 0.87% at $0.6603.
Investors awaited comments later on Tuesday from the Fed’s Christopher Waller, whose dovish turn in late November helped to trigger a blistering year-end market rally.
Markets are pricing in a 69% chance of a 25 bp cut in March from the Fed, versus 77% a day earlier and 63% a week earlier, the CME FedWatch Tool showed. Traders expect cuts of roughly 160 bps this year.
Investors were also monitoring news from the Red Sea. An official from the Iran-aligned Houthi movement said on Monday the group will expand its targets to include U.S. ships, and would maintain attacks after U.S. and British strikes on its sites in Yemen.
In Iowa, Donald Trump asserted his command over the Republican party with a resounding win on Monday in the first 2023 presidential contest for the party.
Rabobank’s Foley said the result could be weighing on the euro “at the margin” as investors begin to think about what a more isolationist America under a potential Trump presidency might mean for Europe.
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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