Forex
Dollar edges lower after data as recent rally stalls
By Chuck Mikolajczak
NEW YORK (Reuters) -The dollar slipped for a second straight session, as a recent ascent lost steam, but the greenback was still on track for a fourth straight week of gains after data this week kept interest rate expectations for the Federal Reserve in check.
The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, jumped 0.5% last month after an unrevised 0.3% gain in August and above the 0.1% rise estimated by economists polled by Reuters.
A separate report by the University of Michigan showed October consumer sentiment rose to 70.5 from 70.1, topping the 69.0 estimate, while the one-year inflation outlook fell to 2.7% from the preliminary reading of 2.9% but in line with September’s final result.
The dollar was poised for its fourth straight week of gains, as a run of positive economic data has quieted expectations about the size and speed of the Fed’s rate cuts, which has also lifted U.S. Treasury yields. Investors are now focusing on a key government payrolls report next week.
“We had a massive recalibration in economic expectations for the U.S. and that process seems to have largely run its course, the Fed’s policy trajectory looks much more reasonable and interest rate differentials between the U.S. and other major economies are stabilizing here,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
“The , which measures the greenback against a basket of currencies, shed 0.02% to 104.03, with the euro up 0.02% at $1.083.
In Europe, a survey on Friday of German business sentiment showed confidence improved more than expected this month, snapping four straight months of declines, offering hope for some respite towards the end of the year in the economy’s battle with industrial woes and soft global demand.
European Central Bank (ECB) President Christine Lagarde said the euro zone’s inflation is “well on track” to hit the European Central Bank’s 2% target next year, reiterating the bank’s most recent guidance.
The dollar has also benefited from a rise in market expectations for a victory next month by Republican candidate and former U.S. President Donald Trump, which would likely bring about inflationary policies such as tariffs.
Schamotta said that while those policies should support the dollar, that could be already priced in and their negative effects such as inflation could dampen consumer sentiment and weaken the dollar more than markets had expected two weeks ago.
Markets are pricing in a 95.6% chance for a cut of 25 basis points at the Fed’s November meeting, with a 4.4% chance of the U.S. central bank holding rates steady, according to CME’s FedWatch Tool. The market was completely pricing in a cut of at least 25 bps a month ago, with a 57.4% chance of a 50 bps cut.
Against the Japanese yen, the dollar strengthened 0.13% to 152.02. Sterling strengthened 0.13% to $1.2989.
Japanese voters were set to head to the polls on Sunday for a general election with opinion surveys showing the ruling Liberal Democratic Party (LDP) could lose its dominance that has lasted for more than a decade, possibly complicating monetary policy plans for the Bank of Japan (BOJ).
The BOJ is scheduled to meet next week and is expected to maintain ultra-low interest rates next week, and probably signal a less dovish policy outlook due to receding fears of U.S. recession – and the need to keep speculators from pushing down the yen too much.
Another potential complication for the BOJ was data that showed core inflation in Japan’s capital in October dipped below the central bank’s 2% target for the first time in five months.
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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