Forex
Dollar hits new one-month high as data weighs on rate cut hopes
© Reuters. FILE PHOTO: U.S. one hundred dollar notes are seen in this picture illustration taken in Seoul February 7, 2011. REUTERS/Lee Jae-Won/File Photo
By Chuck Mikolajczak
NEW YORK (Reuters) -The hit a fresh one-month high on Wednesday after U.S. retail sales data signaled economic strength, dimming expectations for imminent rate cuts from the Federal Reserve.
Retail sales rose 0.6% last month after an unrevised 0.3% gain in November, the Commerce Department’s Census Bureau said. Economists polled by Reuters had forecast retail sales gaining 0.4%.
While markets still see the Fed as likely to trim rates in March, expectations for a first cut of at least 25 basis points (bps) are down to 53.2%, according to CME’s FedWatch Tool, from 65.1% on Tuesday.
“If we look at this morning’s retail sales report, that points to growth on virtually every possible level and across every aggregate within the consumer spending sphere,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
“That points to underlying inflation pressure remaining sticky for longer, and that coincides with the fact that we’re seeing a concerted push from policymakers to anchor market expectations out into the middle of the year for the first cut, and also to warn markets that the cadence of rate cuts is going to be slower than anticipated.”
The dollar index which tracks the greenback against a basket of currencies of other major trading partners, was up 0.12% at 103.42, after climbing to 103.69, its highest since Dec. 13.
The greenback jumped 0.67% on Tuesday, its biggest one-day percentage climb since Jan. 3, buoyed in part by comments from Fed Governor Christopher Waller. He said that while the U.S. was “within striking distance” of the Fed’s 2% inflation goal, the central bank should not rush to cut its benchmark interest rate until it was clear lower inflation would be sustained.
The Fed’s “Beige Book” of economic activity showed the majority of the 12 districts reported little or no change since the prior period, while nearly all noted a cooling labor market. Federal Reserve Bank of New York President John Williams is scheduled to speak at 3 p.m. EST (2000 GMT).
Also supporting the dollar was data showing China’s economy grew 5.2% in 2023, slightly more than the official target, but it was a far shakier recovery than many expected while its property crisis deepened.
The dollar touched 148.52 against the rate-sensitive Japanese yen, its highest since Nov. 28, and was last up 0.71% at 148.23. The greenback also hit a two-month high of 7.2321 against China’s .
The euro was down 0.01% at $1.0873 against the dollar, a day after falling 0.67% drop, even as European Central Bank (ECB) policymakers tried to dispel expectations of looming rate cuts.
Dutch central bank chief Klaas Knot told CNBC on Wednesday that investor bets for ECB rate cuts were excessive and possibly self-defeating because they could actually hold back monetary easing. ECB President Christine Lagarde told Bloomberg TV in Davos the central bank was on track to get inflation back to its 2% target but victory has not yet been won.
Sterling was last trading at $1.268, up 0.32% on the day, on track for its first gain against the dollar after three sessions of declines, as a rise in British inflation reinforced expectations that the Bank of England would be slower to cut rates than other central banks.
In cryptocurrencies, fell 1.9% to $42,603.
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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