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Forex

Dollar struggles for direction, euro close to 1-1/2-month low

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By Stefano Rebaudo

(Reuters) -The dollar struggled for direction on Wednesday while the euro remained close to its recent lows on concerns that a new government in France could weaken fiscal discipline, increasing the debt risk premium across the euro area.

Meanwhile sterling rose after data showed British service inflation was stronger than expected.

U.S. markets are closed on Wednesday, which is likely to result in muted trading.

The greenback dropped overnight as U.S. retail sales suggested that economic activity remained lacklustre and the Federal Reserve will cut rates sooner.

The euro rose 0.1% to $1.0746; it hit on Friday a 1-1/2-month low at $1.07.

The yield gap between French and German government debt, which is now seen as a gauge of risks of a budget crisis at the heart of Europe, eased slightly since Monday but remained close to its seven-year highs hit last week.

Analysts flagged that the single currency was far from pricing any serious threat to the financial stability of the euro area bloc.

“The very limited move in forex in contrast to the OAT (French government bond yield) spread move does underline the fact that the reaction is more about a reappraisal of fixed income risks,” said Derek Halpenny, head of research global markets at MUFG.

National Rally’s (NR) leader, Marine Le Pen, said she sought cohabitation with President Emmanuel Macron and would be respectful of institutions, triggering expectations that NR could backtrack on fiscally expensive pledges if it should win the elections in early July.

The European Central Bank could also buy French bonds to avoid “unwarranted and disorderly” yield spread widening. Still, ECB chief economist Philip Lane said recent market turmoil was “not disorderly”.

The European Commission on Wednesday proposed widely expected disciplinary steps against France, Italy and five other European Union countries over running excessive budget deficits.

The was flat at 105.20.

Markets are now pricing in an around 65% chance the Fed will begin easing rates in September, according to the CME FedWatch tool, with nearly 50 basis points worth of cuts expected this year.

Sterling rose 0.1% against the euro to 84.43 pence per euro and 0.13% against the dollar to $1.2725 after British data showed underlying price pressures remained strong.

“What matters now is how much stock the Monetary Policy Committee puts on the spot – and arguably backward-looking – data,” said said Sanjay Raja, chief U.K. economist at Deutsche Bank Research, recalling that survey figures have been “more encouraging.”

Markets priced an around 25% chance of a Bank of England rate cut in August, down from 50% before data, and 44 basis points of monetary easing in 2024, down from almost half percentage point before figures.

The BoE holds its policy meeting on Thursday.

The Swiss Franc hit a seven-month high against the euro at 0.9479, and was last down 0.1% at 0.9503.

The single currency has weakened constantly against the Swiss currency since the end of May when it hit 0.9930 per franc, its highest since April 2023.

“Some observers see this as a renewed threat of intervention or as an implicit put that (Swiss National Bank Chairman Thomas) Jordan is offering to all market participants who hold long Swiss Franc positions, especially against the euro,” said Ulrich Leuchtmann head of forex strategy at Commerzbank (ETR:), recalling a speech by Jordan at the end of May.

Jordan argued that inflation risks would likely be associated with a weaker Swiss franc, which the SNB “could counteract by selling foreign exchange.”

BofA expects the SNB to deliver its second 25 bps cut next week and to state a willingness “to be active in the foreign exchange market as necessary”.

The Australian dollar rose 0.29% to $0.6675 against the U.S. currency, also helped by a hawkish message from Reserve Bank of Australia Governor Michele Bullock after the central bank’s rate decision on Tuesday.

© Reuters. FILE PHOTO: U.S. Dollar and Japan Yen notes are seen in this June 22, 2017 illustration photo.   REUTERS/Thomas White/Illustration/File Photo

The yen was little changed at 157.925 per dollar, as it continues to be pressured by stark interest rate differentials between Japan and the U.S., in particular.

Analysts said Bank of Japan monetary tightening was on the horizon, but the BOJ would take a slow approach.

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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Forex

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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