Forex
Analysis-Dollar bears eye shifts in global yields, growth to play further weakness
By Saqib Iqbal Ahmed
NEW YORK (Reuters) -Traders gauging how to play further downside in the U.S. dollar are looking to the relative strength of economies around the world, as interest rate shifts from global central banks shake up currency markets.
The fell 4.8% against a basket of currencies in the third quarter, its worst quarterly performance in nearly two years. Pressure on the U.S. currency increased after the Fed delivered a jumbo-sized 50 basis point cut last month, its first reduction since 2020.
How much further the dollar falls and which currencies will benefit may largely be a question of yields. For years, U.S. yields have stood above most developed economies, bolstering the dollar’s allure against its peers.
That picture is shifting, with the Fed and most other central banks cutting interest rates to safeguard economic growth. Many traders betting against the buck are doing so through currencies whose yield gap with the dollar is expected to narrow.
Net bets on a weaker dollar have grown to $14.1 billion in futures markets, the highest level in about a year, Commodity Futures Trading Commission data showed. The path lower for the dollar, however, is likely to be a bumpy one.
The comparatively strong U.S. economy could limit how much the Fed cuts rates, complicating the outlook for further dollar declines. Meanwhile, the U.S. presidential election and geopolitical worries threaten to inject further volatility into currency markets in coming weeks.
“It’s not just necessarily ‘sell the dollar and buy everything,'” said Jack McIntyre, portfolio manager at Brandywine Global. “You have to be a little more selective.”
While the is little changed for the year, it is down about 5% from its April high, with the currency notching drops against several developed market peers as U.S. yields fell in anticipation of monetary policy easing by the Fed.
Some of the risks to the weaker dollar view became more apparent in recent days.
The dollar rose sharply against the British pound on Thursday after the Bank of England said it could move more aggressively to cut interest rates if inflation pressures continued to weaken.
A day before, data showed euro zone inflation dipped below 2% for the first time since mid-2021 in September, reinforcing the case for the European Central Bank to cut rates this month, a potential source of weakness for the euro.
The dollar’s role as a safe haven has also been on display as Middle East tensions have escalated in recent days.
From the U.S. side, Friday’s labor market data could help shape views on how much the Fed might cut rates for the rest of the year.
Though futures markets show an additional 68 basis points of cuts priced in, a strong number could bolster the case for more moderate policy easing. However, “if we are entering a soft patch for the U.S. economy, the market is going to discount more cuts into the curve and that will weaken the dollar,” said Christian Dery, head of macro strategy at Capital Fund Management.
Nevertheless, investors believe more downside remains for the dollar in some corners of the market.
Paresh Upadhyaya, director of fixed-income and currency strategy at Amundi US, said he is looking for “idiosyncratic stories like widening interest rate differentials caused by a divergence in monetary policy.”
His plays on a weaker dollar include positions in the Norwegian krone and Australian dollar. Norway’s central bank recently held its policy interest rate at a 16-year high, signaling any cuts must wait until early 2025. Australia’s central bank held rates steady last week and said interest rate cuts were unlikely in the near term.
Upadhyaya also added to a position in the Brazilian real. Unlike many of its peers, Brazil’s central bank hiked rates last month as it looks to tackle a challenging inflation outlook. The Brazilian real is down about 10% against the dollar this year.
The Japanese yen could also find further support from diverging central bank policy, investors said. The Bank of Japan tightened rates to 0.25% in July in a landmark shift away from a decade-long stimulus program aimed at firing up economic growth.
Though the Bank of Japan has signaled it is in no rush to raise rates further, the narrowing gap between rates in Japan and the U.S. has already fueled a 10% rally in the yen from its 2024 lows against the dollar. Net bullish bets on the currency against the dollar stand at $5.8 billion, CFTC data showed.
“With global central banks also starting to cut rates, the biggest gainer versus the USD will be in the likes of the (yen),” said Natsumi Matsuba, head of FX trading and portfolio management at Russell Investments.
An analysis of currency valuations based on metrics such as purchasing power parity and real effective exchange rates released by BofA Global Research last month showed that the yen and Norwegian krone are among the developed world’s most undervalued currencies. The dollar and Swiss franc are the two most overvalued, the study found.
Whatever their positioning, however, investors must also contend with potential volatility surrounding the U.S. presidential election, slated for Nov. 5.
Uncertainty in the weeks before the vote could send safety-seeking investors to the dollar. Many investors also believe a win by Republican candidate Donald Trump could buoy the dollar.
“The wild card in any forecast right now for our currency is the U.S. election,” said Brandywine’s McIntyre, who remains bearish on the U.S. dollar, but less so than before the currency’s recent slide. “That’s why it’s hard to be super convicted.”
By Chuck Mikolajczak
NEW YORK (Reuters) -The dollar rose to a 13-month high in choppy trading on Thursday as investors assessed the latest labor market data and comments from Federal Reserve officials for the path of interest rates, while bitcoin continued its march toward the $100,000 level.
Weekly initial jobless claims dropped 6,000 to a seasonally adjusted 213,000, a seven-month low, and below the 220,000 estimate of economists polled by Reuters, indicating job growth rebounded after being disrupted by hurricanes and labor strikes last month.
However, the report also indicated labor market slack as it is taking longer for the unemployed to find new jobs, as unemployment rolls grew to their highest levels in three years, giving the Fed cushion to cut rates again in December.
continued its recent rally that has seen the cryptocurrency surge more than 40% since the U.S. election on expectations President-elect Donald Trump will loosen the regulatory environment for cryptocurrencies.
Bitcoin gained 4.23% to $98,458 after reaching a record high of $99,057. The Securities and Exchange Commission said Chair Gary Gensler, who challenged the crypto industry, will step down on Jan. 20.
Recent comments from Fed officials, including Chair Jerome Powell, have indicated the central bank may take a slower course in its rate cut path, while concerns that Trump’s policies could reignite inflation have helped push the dollar to a high of 107.15, its highest level since Oct. 4, 2023.
The , which measures the greenback against a basket of currencies, rose 0.39% to 107.03, with the euro down 0.64% at $1.0476 after falling to $1.0461, its lowest in 13 months.
“One could argue that the market is now pretty hawkishly priced, kind of the other side of the boat again, so it’s starting to look a little bit aggressive in some of the Fed pricing and probably in the Bank of England as well, but at the same time they are kind of talking very hawkishly lately,” said Brad Bechtel, global head of FX at Jefferies in New York.
“We’re just going to kind of chop around, there’s a lot embedded in the dollar price at current levels so I definitely wouldn’t be chasing it.”
European Central Bank chief economist Philip Lane said global economic output would suffer a “sizeable” loss if trade became more fragmented and an immediate boost to inflation would only fade over a few years.
Expectations for the path of rate cuts have been scaled back recently. Markets are pricing in a 55.9% chance of a 25-basis-point cut at the Fed’s December meeting, down from 72.2% a week ago, according to CME’s FedWatch Tool.
Federal Reserve Bank of New York President John Williams told Barron’s in an interview published on Thursday he sees inflation cooling and interest rates falling further while Federal Reserve Bank of Richmond President Tom Barkin said in an interview with the Financial Times the U.S. is more vulnerable to inflationary shocks than in the past.
In addition, Chicago Federal Reserve President Austan Goolsbee reiterated his support for further interest rate cuts and receptiveness to doing them more slowly.
Safe-haven currencies such as the Japanese yen and Swiss franc briefly strengthened on the latest potential signs of the conflict between Ukraine and Russia escalating before reversing course.
Against the Japanese yen, the dollar weakened 0.56% to 154.56 after dropping as much as 0.98%, and against the Swiss franc, the dollar gained 0.29% to 0.887 after falling as much as 0.21% on the session.
Bank of Japan Governor Kazuo Ueda said on Thursday the central bank would “seriously” take into account foreign exchange rate moves in compiling its economic and price forecasts.
By Amanda Cooper
LONDON (Reuters) – The pound eased modestly against the dollar, which held firm on Thursday, as investors remained laser-focused on who President-elect Donald Trump’s Treasury Secretary pick might be and what that might mean for his policies on growth, trade and taxes.
With the dollar in the ascendant, sterling wilted, last down 0.1% at $1.26405.
It’s risen 1.2% against the euro, which has come under intense pressure against the dollar in particular, as traders try to factor in the potential hit to euro zone growth from an aggressive stance on tariffs from the incoming Trump administration.
The pound got a brief lift the day before from data that showed UK consumer inflation staged an unwelcome pickup in October, confirming the belief in the market that the Bank of England will be one of the slowest among the big central banks to lower rates meaningfully over the coming year.
Even against that backdrop, sterling has fallen by close to 2% against the dollar this month and turned negative on the year.
Money markets currently show traders believe the BoE could lower rates by around 68 basis points by next December. For the Bank’s next meeting on Dec. 19, there’s no expectation of any move at all.
Commerzbank (ETR:) strategist Michael Pfister noted that there is barely a 50% chance priced in for a rate cut in February either.
“We still believe that the next rate cut will take place then. The argument in favour of this is that monetary policy is still likely to be seen as quite restrictive and policymakers will certainly want to avoid falling behind the curve,” he said.
He added that if inflation data shows a sustained pickup, the discussions around a February cut are “likely to intensify”.
Next (LON:) up on the macro calendar are preliminary surveys of business activity for November for the UK, the euro zone, the United States and elsewhere due on Friday.
The most recent Purchasing Managers’ Index (PMI) for October came in at 52 for Britain, above the 50 mark that separates growth from contraction and ranking the UK second behind the United States, which logged a reading of 54 last month.
Friday’s PMI is expected to come in at 51.8, according to a Reuters poll of economists.
Investing.com – The US dollar climbed to a new high Friday, while the euro slumped as data continued to illustrate the weak state of the eurozone economy.
At 05:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.6% higher to 107.614, after earlier climbing to its highest level since early October, 2023.
Dollar heads relentlessly higher
The dollar has gained some 3% so far this month in the wake of Donald Trump’s presidential election victory on expectations that his policies could reignite inflation and limit the Fed’s ability to cut rates.
The release of solid employment data on Thursday also helped the tone, as unexpectedly slowed.
“It was, however, some Fedspeak that likely encouraged dollar buying as New York Fed President John Williams – not usually a hawk – said the US is ‘not quite there yet’ on inflation and that the jobs market needs to cool further for easing,” said analysts at ING, in a note.
Markets now see a 57.8% chance of a 25-basis-point cut, down from 72.2% a week ago, according to CME’s FedWatch Tool.
The US currency’s safe haven status has also been a boon given the recent escalations in the conflict between Russia and Ukraine.
“Markets are clearly taking the escalation in the Russia-Ukraine war more seriously, which is favoring a broader rotation to haven assets like the dollar,” ING added.
Euro slips to two-year low
In Europe, traded 0.8% lower to 1.0389, falling to its lowest level in two years, with the single currency weighed by the region’s weak economic outlook as well as being buffeted by events in Ukraine this week.
Eurozone business activity took a surprisingly sharp turn for the worse this month as the bloc’s dominant services industry contracted and manufacturing sank deeper into recession, a survey showed on Friday.
The preliminary , compiled by S&P Global, sank to a 10-month low of 48.1 in November, below the 50 mark separating growth from contraction.
“The release has risen from being almost disregarded to a de-facto critical input for policy decision given the Governing Council’s greater focus on forward looking indicators of growth,” ING said.
Earlier in the session data showed that Germany’s , the largest in the eurozone, grew less than previously estimated in the third quarter, expanding by 0.1% in the third quarter of 2024, down from a preliminary reading of 0.2% growth.
fell 0.4% to 1.2536, falling to its weakest against the dollar since May, as British business output shrank for the first time in more than a year.
The preliminary S&P Global Flash , fell to 49.9 in November – below the significant 50.0 level for the first time in 13 months – from 51.8 in October.
Yen gains after Japanese CPI
fell 0.1% to 154.38, after Japanese inflation grew slightly more than expected in October, while the core measure rose above the central bank’s annual target band, keeping bets alive for another rate hike by the Bank of Japan.
climbed 0.2% to 7.2491, near a four-month high.
The yuan has depreciated as much as 1.8% against the dollar so far in November, as inadequate signals on Chinese stimulus measures also weighed on local markets.
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