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.”
The British pound continued its historical trend of starting the year on a weak note, marking a seventh consecutive year of losses on the first trading day after New Year’s Day.
Deutsche Bank (ETR:) analysts noted that the pound fell over one percent today, contributing to a long-term pattern where sterling has only posted three positive returns on the first trading day of the past twenty years.
The bank’s analysis suggested that the pound’s performance is not isolated, as the Euro against the U.S. dollar () has shown a similar pattern, though slightly less pronounced. The movements in the Cable, the term used for the currency pair, often align with the repricing of relative interest rates at the start of the year.
However, today’s interest rate movements were minimal, despite a downward revision in the UK’s manufacturing PMI and more favorable unemployment claims data from the U.S.
Deutsche Bank attributed the additional underperformance of the pound to a “beta of the technical breaks” from last year, referencing the fall of the Euro to last year’s lows and the decline of the pound to multi-month lows.
The technical analysis suggests that these breaks in key support levels have contributed to the downward pressure on sterling.
Looking ahead, Deutsche Bank found no strong pattern that would indicate whether the initial losses of the pound on the first trading day would reverse or continue in the week following.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Investing.com – The US dollar was trading higher on Thursday, the first day of 2025 trading, on hopes that U.S. growth will beat peers, a more hawkish Fed stance and expectations for the incoming Donald Trump administration.
At 12.30 ET (5:30 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.8% higher to 109.170.
Dollar to remain in demand in 2025
The index rose 7% in 2024 as traders drastically cut back Fed rate-cut expectations in the wake of the projections of the policymakers after the December policy-setting meeting.
The US central bank projected just two 25 bp rate cuts in 2025 at its last policy meeting of the year, a sharp reduction from the four cuts it had indicated in September.
In fact, markets are currently only pricing in 42 bps of cuts from the US central bank in 2025, with the return of Donald Trump to the White House adding a degree of uncertainty given his policies of looser regulation, tax cuts, tariff hikes and tighter immigration are seen as both pro-growth and inflationary.
Focus turns to the release later in the session of weekly numbers as well as the December number, for clues towards the strength of the US economy.
In Europe, traded 0.9% lower to 1.0258, following the more than 6% drop in 2024.
Data released earlier Thursday showed that manufacturing activity in the eurozone declining at a faster rate at the end of the year, offering scant signals of an imminent recovery.
HCOB’s final , compiled by S&P Global, dipped to 45.1 in December, with the downturn broad-based as the bloc’s three largest economies – Germany, France and Italy – were stuck in an industrial recession.
Traders expected more interest rate cuts from the European Central Bank in 2025, with markets pricing in 113 basis points of easing, much more than the Federal Reserve.
This divergence in Fed & ECB policy “will push the euro to parity vs the dollar in the course of 2025,” said analysts at ABN Amro, in a note.
traded 1.2% lower to 1.2366, adding to the fall of 1.7% last year, but was nevertheless the best-performing G10 currency versus the dollar.
UK rose in December, according to mortgage lender Nationwide, jumping by 0.7% in monthly terms during December, following a 1.2% increase in November.
The resilience of the UK housing market has surprised many given indications of weakening activity across the wider economy, with prices ending the year 4.7% higher than their level of December 2023, up from 3.7% in November – the highest annual growth rate since late 2022.
The held interest rates unchanged last month after consumer prices rose above target, and this central bank is likely to remain more cautious than its eurozone counterpart in 2025.
Slowing Chinese manufacturing growth
In Asia, rose 0.6% to 7.3435, climbing to its highest level in over a year after data showed that the country’s manufacturing sector grew less than expected in December.
The reading came just days after government PMI data also showed weaker-than-expected growth in the manufacturing sector.
The prints ramped up concerns over a slowing economic recovery in China, with recent stimulus measures having provided only limited support.
traded 0.35% higher to 157.79, amid a mostly dovish outlook for 2025 from the Bank of Japan.
Investing.com– Most Asian currencies moved in a flat-to-low range on Friday, pressured by strength in the dollar as traders positioned for a slower pace of interest rate cuts by the Federal Reserve in 2025.
Regional trading volumes remained slim on account of the new year holidays, with Japanese markets remaining closed until next week.
The Chinese yuan was among the worst performers in Asia, hitting its weakest level in nearly 16 months as a Financial Times report said the People’s Bank of China will cut interest rates further in 2025.
The yuan, along with its regional peers, was also nursing steep losses in 2024, as the dollar benefited from a hawkish Fed and the prospect of protectionist policies under incoming President Donald Trump.
Dollar at 2-yr high as rate cut bets ease
The and fell 0.1% in Asian trade after racing to a fresh two-year high on Thursday.
The greenback’s latest round of gains came after weekly data read stronger than expected, indicating that the labor market remained strong. A strong labor market gives the Fed more headroom in considering future monetary easing.
The central bank signaled during its December meeting that it will cut interest rates at a substantially slower pace in 2025, citing concerns over sticky inflation.
Resilience in the U.S. economy also gives the Fed less impetus to cut rates, although the Atlanta Fed’s was revised lower for the fourth quarter on Thursday.
Chinese yuan weakens as PBOC flags more rate cuts
The Chinese yuan was among the worst performers in Asia, with the pair rising nearly 0.4% to 7.3275 yuan- its highest level since September 2023.
The FT reported that the PBOC will cut interest rates further in 2025, as the central bank pivots to a more conventional monetary policy structure under a singular benchmark interest rate.
The monetary policy reform comes as a slew of liquidity measures largely failed to stimulate China’s economy over the past two years. This is expected to elicit more monetary easing by the PBOC, which bodes poorly for the yuan.
The yuan was already nursing losses for the week, as purchasing managers index data released earlier showed slowing growth in China’s manufacturing sector.
Broader Asian currencies moved in a tight range, but were nursing steep losses in recent months as traders positioned for a slower pace of U.S. rate cuts in 2025.
The Japanese yen’s pair fell 0.1% after hitting an over five-month high in late-December.
The Australian dollar’s pair rose 0.2%, while the South Korean won’s pair fell 0.2% amid repeated assurances of financial stability from the government.
The Indian rupee’s pair steadied at 85.8 rupees after hitting a record high above 86 rupees earlier this week.
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