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Forex

Dollar finds a footing after sharp drop but yen keeps rallying

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By Harry Robertson

LONDON (Reuters) -The dollar bounced on Tuesday after falling to its lowest against the euro, sterling and Swiss franc since mid-March overnight as signs of a softening U.S. economy boosted the case for earlier Federal Reserve interest rate cuts.

Yet the yen powered 0.6% higher for a second day of solid gains as Bank of Japan officials warned they are keeping a close eye on the currency, and a report said the BOJ could soon discuss reducing bond purchases.

The euro was last down 0.4% at $1.0863 on Tuesday after rising as high as $1.0916 for the first time since March 21 in the Asian trading session. It climbed 0.5% as the dollar dropped on Monday.

As the U.S. currency found a footing, the was up 0.27% at 104.32, having fallen to its lowest since mid-April overnight at 103.99.

Data on Monday showed a second straight month of slowdown in manufacturing activity and an unexpected decline in construction spending, causing the dollar index to fall around 0.6%.

“Today’s US JOLTS job openings data could determine whether recent dollar losses are… the start of an important new trend,” said Chris Turner, global head of markets at lender ING.

The U.S. job openings and labour turnover survey (JOLTS) is due out at 1400 GMT, or 10 a.m. ET, and will show the number of vacancies in May. It will also report on the number of people voluntarily quitting their job.

Japan’s yen bucked the trend on Tuesday and continued to rise against the dollar after climbing on Monday, with the U.S. currency down 0.6% at 155.105, around its weakest in two weeks.

Bank of Japan Deputy Governor Ryozo Himino said on Tuesday the central bank must be “very vigilant” to the impact the yen’s fluctuations could have on inflation in guiding monetary policy.

Bloomberg reported that the BOJ will discuss slowing its bond purchases at its two-day policy meeting next week. That could push up yields in the coming weeks and may come before an interest-rate hike in July, something analysts at TD Securities said they now expect on Tuesday.

“We are inclined to see these stories as a test of the market’s reaction rather than anything more concrete, not least given the BOJ’s revealed preference for slow… adjustment,” said Nicholas Rees, FX market analyst at Monex Europe.

Sterling hit its highest since mid-March too at $1.2818 before falling to sit 0.43% lower.

Back in Europe, the dollar fell 0.2% to its lowest against the Swiss franc since mid-March at 0.8938 francs. Data showed Swiss inflation held steady at 1.4% year-on-year in May.

Investors were also keeping an eye on India’s rupee as election results come in, with the currency down on Tuesday amid a lack of clarity about the performance of the alliance led by Indian Prime Minister Narendra Modi.

A number of currencies that have been central to carry trades – whereby investors borrow in countries where interest rates are low and buy the bonds of those where rates are high – saw notable swings on Tuesday.

The high-yielding Mexican peso continued to fall as investors reacted to Claudia Sheinbaum’s landslide victory in Sunday’s presidential election. The low-yielding Japanese and Swiss currencies rallied, while high-yielding sterling dropped.

© Reuters. U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

Also impacting currency markets was a drop in oil prices as investors worried about supply rising later in the year amid signs of weakening U.S. demand.

Australia’s dollar fell 0.8% while Norway’s crown dropped 0.9% in a sign of the currencies of commodity-producing countries coming under pressure.

Forex

Dollar bounces after sharp loss; euro retreats on Lagarde comment

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Investing.com – The US dollar edged higher Monday, rebounding after the sharp losses at the end of last week on signs of cooling inflationary pressures, while the euro slipped following dovish comments from ECB head Christine Lagarde.

At 05:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% higher to 107.750, after falling sharply from a two-year high on Friday.

Dollar bounces after sharp retreat

The dollar bounced Monday after falling sharply on Friday as the Federal Reserve’s preferred showed moderate monthly rises in prices, with a measure of underlying inflation posting its smallest gain in six months. 

That eased some concerns about how much the may cut in 2025, which had risen following the hawkish US rate outlook after the last Fed policy meeting of the year.

That said, traders are pricing in 38 basis points of rate cuts next year, shy of the two 25 bp rate cuts the Fed projected last week, with the market pushing the first easing of 2025 out to June, with a cut in March priced at around 53%.

Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.

Eurozone “very close” to ECB inflation goal

In Europe, fell 0.1% to 1.0414, near a two-year low it touched in November, down 5.5% this year, after European Central Bank President said the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.

“We’re getting very close to that stage when we can declare that we have sustainably brought inflation to our medium-term 2%,” Lagarde said in an interview published by the Financial Times on Monday.

Earlier in December, Lagarde had said the central bank would cut interest rates further if inflation continued to ease towards its 2% target, as curbing growth was no longer necessary.

The lowered its key rate last week for the fourth time this year, and is likely to cut interest rates further in 2025 if inflation worries fade.

traded largely flat at 1.2571, after data showed that Britain’s economy failed to grow in the third quarter, adding to the signs of an economic slowdown.

The Office for National Statistics lowered its estimate for the change in output to 0.0% in the July-to-September period from a previous estimate of 0.1% growth.

The ONS also cut its estimate for growth in the second quarter to 0.4% from a previous 0.5%.

policymakers voted 6-3 to keep interest rates on hold last week, a bigger split than expected, amid worries over a slowing economy.

Yuan hits one-year high

In Asia, rose 0.2% to 156.72, after rising as far as 158 last week following dovish signals from the .

The BOJ signaled that it was not considering interest rate hikes in the near-term despite a recent pick-up in inflation, and could raise rates by as late as March 2025.

edged 0.2% higher to 7.3080, hitting a one-year high as traders continued to fret over China’s economic outlook. While Beijing is expected to ramp up fiscal spending in the coming year to support the economy, looser monetary conditions are expected to undermine the yuan.

 

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Asia FX muted, dollar slips from 2-yr high on soft inflation data

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Investing.com– Most Asian currencies moved little on Monday, while the dollar steadied from a tumble from over two-year highs after soft U.S. inflation data spurred some hopes that interest rates will still fall in 2025. 

Asian currencies were nursing steep losses against the dollar from last week, although they trimmed some declines on Friday after the soft inflation data. The outlook for regional markets also remains clouded by uncertainty over U.S. interest rates and policy under incoming President Donald Trump. 

Dollar slips from 2-yr high as PCE data misses expectations 

The and both steadied on Monday after clocking sharp losses on Friday.

The greenback slid from an over two-year peak after data- the Federal Reserve’s preferred inflation gauge- read softer-than-expected on Friday. 

Still, the reading remained above the Fed’s 2% annual target, keeping uncertainty over interest rates in play.

The Fed had cut interest rates by 25 basis points last week, but flagged a slower pace of interest rate cuts in the coming year, citing concerns over sticky inflation and resilience in the labor market. 

The Fed is expected to cut rates twice in 2025, although the path of rates still remains uncertain.

Markets took some relief from the government avoiding a shutdown after lawmakers approved an eleventh-hour spending bill.

Asia FX pressured by rate uncertainty 

Despite clocking some gains on Friday, most Asian currencies were still trading lower for December, as the outlook for interest rates remained uncertain.

The Japanese yen’s pair rose 0.1% to around 156.59 yen, after rising as far as 158 yen last week following dovish signals from the Bank of Japan.

The BOJ signaled that it was not considering interest rate hikes in the near-term despite a recent pick-up in inflation, and could raise rates by as late as March 2025. 

The Chinese yuan’s pair rose 0.1%, hitting a one-year high as traders continued to fret over China’s economic outlook. While Beijing is expected to ramp up fiscal spending in the coming year to support the economy, looser monetary conditions are expected to undermine the yuan. 

The Singapore dollar’s pair was flat ahead of inflation data due later in the day, while the South Korea’s won’s pair rose 0.3%.

The Australian dollar’s pair rose slightly after sinking to a two-year low last week. 

The Indian rupee’s pair steadied after hitting a record high of over 85 rupees last week.

 

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Forex

Dollar to weaken less than expected next year: UBS

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Investing.com — The dollar recently notched fresh year-to-date highs against its rivals and is likely to remain strong after the Federal Reserve leaned more hawkish at its recent December meeting, analysts from UBS said in a recent note.

“While we still expect the dollar to fall, we now see less weakness in 2025 given these factors and adjust our forecasts slightly,” analysts from UBS said in a recent note.

The less bearish view on the USD comes in the wake of the greenback making fresh year-to-date highs in key exchange rates and the expectations for fewer U.S. rate cuts. 

“The USD has been driven lately by prospects of fewer Fed rate cuts and tariff risks,” the analysts said.

The euro has been particularly affected by dollar strength, but is expected to trade around $1.05 against the greenback in the first half of 2025, the analysts forecast. 

But a significant drop toward parity for the can’t be ruled out, “due to real tariff threats or further divergence in the macro backdrop between the US and Europe,” the analysts added.

Still, any move toward parity should be short-lived, the analysts said, amid expectations for the economic backdrop in Europe to improve in the second half of the year, narrowing the divergence between Europe and U.S. yields. 

“The trajectory back into the middle of the trading range or higher, 1.08 to 1.10, comes with the view that two-year yield differentials will still narrow to some degree and better macro data out of Europe provide some underlying support for EURUSD in 2H25,” the analysts said.

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