Forex
Dollar stays strong, political uncertainty saps euro
By Brigid Riley and Amanda Cooper
TOKYO/LONDON (Reuters) -The dollar held steady on Monday, while the euro traded around more than one-month lows, as political turmoil in Europe ramped up the level of uncertainty among traders, while investors awaited more data to gauge the strength of the U.S. economy.
Investors have been contemplating the risk of a budget crisis at the heart of the euro area, as far-right and leftist parties gain momentum ahead of France’s snap parliamentary election, pressuring President Emmanuel Macron’s centrist administration.
Even after the French financial markets endured a brutal sell-off late last week, European Central Bank policymakers have no plans to discuss emergency purchases of French bonds, five sources told Reuters.
The euro was flat at $1.0713, after falling to its lowest since May 1 at $1.06678 on Friday. It also logged its biggest weekly decline since April at 0.88% last week.
“With traders wanting certainty, this may not come until after the second-round vote (July 7), so the prospect of further downside in French and EU markets is real,” Chris Weston, head of research at Pepperstone, said.
The , which tracks the U.S. currency against a basket of six others, was unchanged at 105.54, around its highest since May 2, driven mostly by weakness in the euro.
The single European currency “accounts for around 57% of the weighting, the fall of the euro has indirectly benefited the dollar”, Matt Simpson, senior market analyst at City Index, said.
Minneapolis Federal Reserve President Neel Kashkari said on Sunday it was a “reasonable prediction” that the U.S. central bank would cut interest rates once this year and wait until December to do it.
The Fed published updated projections last week that showed the median forecast from all 19 U.S. central bankers was for a single interest rate cut this year.
LIGHT WEEK FOR DATA
This week is light on major U.S. economic data to help clarify the Fed’s outlook, although U.S. retail sales on Tuesday and flash PMIs on Friday may give hints about consumption and economic strength.
“Data would likely have to miss estimates by a wide margin to rekindle bets of more Fed cuts, with the FOMC meeting still freshly in the minds of investors,” said City Index’s Simpson.
Sterling fell 0.1% to $1.2671. Britain’s inflation pressures still appear too hot for the Bank of England to cut rates at its June 20 meeting, with a majority of economists polled by Reuters forecasting the first cut would not come until Aug. 1.
Meanwhile, the yen remained pinned near a 34-year low against the dollar after the Bank of Japan on Friday pushed cuts to bond buying amounts and details of its tapering plan to its July policy meeting.
Governor Kazuo Ueda said he would not rule out raising interest rates in July as weakness in the yen pushes up import costs, although that may not be the hawkish statement that some took it to be, said Hiroyuki Machida, director of Japan FX and commodities sales at Australia & New Zealand Banking Group (OTC:).
“The sense was that raising rates and tapering are two separate things” that the BOJ would decide whether or not to do based on different criteria, he said.
The yen weakened a touch to trade at 157.765 , after slipping to 158.26 after Friday’s decision, its lowest since April 29.
The yen’s decline to 160.245 per dollar at the end of April triggered several rounds of official Japanese intervention totalling 9.79 trillion yen.
In cryptocurrencies, bitcoin fell 1% to $65,794, while ether fell 2% to $3,524, according to LSEG data.
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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