Forex
Euro eases, dollar perks up in muted holiday trade
By Medha Singh and Tom Westbrook
(Reuters) -The euro dipped against the dollar on Thursday as traders reined in bets of more interest rate cuts by the European Central Bank, while broader currency moves were muted in U.S. holiday-thinned trading.
The Japanese yen slipped to 151.58 per dollar but with its 2.1% gain this week the currency has recovered losses suffered since the U.S. election and was heading for its best weekly showing in three months. Markets see about a 53% chance the Bank of Japan will raise rates next month.
Broad trade was light as U.S. stock and bonds markets were shut for the Thanksgiving holiday.
The ticked up to 106.21 after dropping to as low as 105.85 in the prior session, a two-week trough.
“It’s likely to be a subdued couple of days to wrap up the week but I expect the dollar should rebound as December gets underway,” said Michael Brown, senior research strategist at Pepperstone, adding that Wednesday’s move that put the dollar back under 106 seemed a bit “detached from fundamentals.”
“We’re still talking about U.S. exceptionalism, an incredibly long laundry list of issues in the euro zone and now we’ve got French budget worries this morning.”
The euro slipped 0.2% to $1.054625 after its sharp rise on Wednesday following hawkish remarks from European Central Bank board member Isabel Schnabel
The comments prompted investors to pull back on more aggressive rate cut expectations and buy the common currency which is on track for its worst month in two-and-a-half years.
German annual inflation was flat in November despite expectations of a second consecutive increase. It comes ahead of euro zone inflation data on Friday which could offer hints on the ECB’s next steps.
Money markets now see only a 13% chance of a larger 50 basis points rate cut by the ECB, whereas last Friday it was a toss up. A 25 bps move is fully priced in.
“Today’s macro data releases in the euro zone should encourage the ECB hawks to object to a 50bp rate cut in December,” said Carsten Brzeski, global head of macro at ING.
Eyes are also on France’s fragile coalition government, which is struggling to pass a budget.
HOLIDAY LULL
Sterling was little changed at $1.2666 versus the greenback, while the Swedish crown firmed against the dollar and euro as data showed sentiment among businesses and consumers in Sweden picked up in November.
The Australian dollar recovered from early weakness and gain slightly to $0.6501. Reserve Bank of Australia governor Michele Bullock said that core inflation was too high to allow for rate cuts in the near term.
While the currency majors were in a bit of a lull, there was some action in emerging markets.
Russia’s rouble strengthened to just over 110 per dollar after shedding nearly a third of its value since August as the Russian central bank said it would stop forex purchases until the end of the year to support the currency.
Brazil’s real touched a record low on concern over the impact of tax cuts on a stretched budget.
South Korea’s won was a little weaker after the central bank cut rates at a second straight meeting – an outcome only four of 38 economists polled by Reuters had foreseen.
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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