Forex
Dollar eases, still close to 5-1/2 month high on Fed, Mideast focus
By Herbert Lash and Stefano Rebaudo
(Reuters) -The dollar eased from near 5-1/2-month highs on Wednesday as Federal Reserve officials reiterated the rate-cutting cycle was on hold pending new economic data, while the monetary easing outlook for major central banks was roughly unchanged.
Top U.S. central bank officials, including Fed Chair Jerome Powell, backed away on Tuesday from providing fresh guidance on when interest rates may be cut, saying instead that monetary policy needed to be restrictive for longer.
Recent data shows the U.S. economy remains stronger than expected, leading investors to reduce their bets on future rate cuts. Meanwhile, risks of a broadening Middle East conflict have added to the dollar’s safe-haven appeal in the short term.
Powell “needed to come back into the center. He was definitely one of the more dovish voices out there,” said Marvin Loh, senior macro strategist at State Street (NYSE:) in Boston. “He can’t afford to be the outlier when he’s the chairman.”
After last week’s hotter-than-expected report on the U.S. Consumer Price Index (CPI), the market has reduced the number of quarter-point interest rate cuts by the Fed this year to less than two, with the first likely in September.
A more hawkish view on interest rates has pushed U.S. yields higher and strengthened the dollar’s outlook as the market consolidates prices around the current range.
“We pushed everything as hard as we could for now, which means from a yield perspective and a higher dollar perspective, we’ll consolidate and trade around the range,” Loh said. “We did build a lot of hawkishness over the course of the last six weeks.”
The , a measure of the U.S. currency against six major trading peers, was down 0.14% and the euro rose 0.2% to $1.0638. The dollar index is up about 4.8% year-to-date, while the euro is down roughly 3.7%.
Some analysts said they were still bullish on the greenback at the current levels.
“On any escalation of the Middle East crisis, we would expect the U.S. dollar to benefit from safe-haven flows,” said Jane Foley, senior forex strategist at Rabobank, who confirmed the target for the euro/dollar at 1.05.
The U.S. and its allies planned fresh sanctions against Iran over its unprecedented attack on Israel, seeking to dissuade Israel from a major escalation as its war cabinet was set to meet again on Wednesday to decide a response.
European Central Bank policymakers continued to make the case for an interest rate cut in June on Tuesday as inflation remains on course to ease back to 2% by next year, even if the path for prices still proves bumpy.
YEN WORRIES
The yen strengthened 0.03% at 154.67 per dollar, just below 154.79 per dollar, its weakest level in 34 years.
Market participants raised the bar of a possible intervention by the Bank of Japan (BOJ) to prop up the Japanese currency, now mentioning the 155 level from the previous 152, even if they believed the BOJ could step in at any time.
They flagged that the latest fall in the Japanese currency was in line with fundamentals, reflecting the pricing of Fed policy, and that authorities were analysing not just the recent yen declines but factors that were driving the moves.
“We think that the potential for BoJ to intervene to bolster the yen appears less evident, given that the dollar is strengthening on a relatively more hawkish Fed,” said Yvan Berthoux, forex strategist at UBS Investment Bank.
Market participants believe that as long as the fall in yen is gradual and led by fundamentals, the probability of a BOJ intervention is low.
“Rhetoric from officials has been more focused on speed of a move rather than levels themselves,” said Kieran Williams, head of Asia FX at InTouch Capital Markets.
Japan last intervened in the currency market in 2022, spending an estimated $60 billion to defend the yen.
Hedge funds have built up their biggest bet against the yen in 17 years, raising the prospect that when Japan’s embattled currency does rebound, the short-covering rally could be a powerful one.
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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