Forex
Dollar gains on geopolitical tensions, pound slips after rate cut
By Karen Brettell
NEW YORK (Reuters) – The dollar gained on Thursday as rising geopolitical tensions provided a safe haven boost to the currency, while the British pound fell after the Bank of England cut interest rates from a 16-year high.
Concerns about a widening conflict in the Middle East intensified this week after Hamas leader Ismail Haniyeh was assassinated in the Iranian capital Tehran on Wednesday morning, an attack that drew threats of revenge on Israel.
“We are looking at the threat of outright conflict breaking out in the Middle East,” said Karl Schamotta, chief market strategist at Corpay in Toronto. “That is supporting the dollar’s safe haven appeal.”
The dollar also bounced as a selloff on Wednesday following dovish comments by Federal Reserve Chair Jerome Powell at the conclusion of the U.S. central bank’s two-day meeting was seen as possibly overdone.
“Although Jerome Powell was extremely dovish in the press conference, the statement released by the Federal Open Market Committee really sounded more balanced,” said Schamotta.
Powell said that interest rates could be cut as soon as September if the U.S. economy follows its expected path, after the Fed’s new policy statement noted that “there has been some further progress toward the (Federal Open Market) Committee’s 2% objective,” while the unemployment rate, at 4.1%, “remains low.”
Traders are now pricing in three 25-basis-point rate cuts by year-end, indicating one cut at each of the Fed’s September, November and December meetings.
The next major U.S. economic release that is likely to drive Fed policy will be Friday’s government jobs report for July. It is expected to show that employers added 175,000 jobs during the month, while the unemployment rate is expected to stay steady at 4.1%.
The was last up 0.06% at 104.11.
Data on Thursday showed that the number of Americans filing new applications for unemployment benefits increased to an 11-month high last week.
Sterling slipped 0.18% to $1.2833 after the Bank of England cut interest rates following a tight vote by its policymakers who were split over whether inflation pressures had eased sufficiently.
Governor Andrew Bailey led the 5-4 decision to reduce rates by a quarter-point to 5% and he said the BoE would move cautiously going forward.
“If you look at the headlines that Bailey produced: caution on cutting too quickly or by too much, it implies to me that they’re looking at a sort of a steady quarterly pace of reductions,” said Colin Asher, economist at Mizuho.
The euro touched a three-week low of $1.07775 and was last down 0.11% at $1.0813.
The Japanese yen dipped, a day after a dramatic rally following the Bank of Japan’s decision to hike rates to 0.25%, the highest since 2008.
The yen has gained since hitting a 38-year low of 161.96 against the dollar on July 3, boosted by interventions by Japanese authorities and traders unwinding carry trades in which they were short the yen and long U.S. dollar assets.
The dollar was last up 0.11% at 150.15.
In cryptocurrencies, bitcoin gained 0.03% to $64,584.
Investing.com– The Japanese yen exhibited minimal movement on Tuesday, despite Bank of Japan (BOJ) Deputy Governor Ryozo Himino indicating a potential hike in the upcoming policy meeting.
Himino suggested that the central bank might consider raising rates, citing sustained wage growth and expectations of a clearer U.S. policy landscape following President-elect Donald Trump’s inaugural address later this month.
The yen’s pair edged 0.1% higher to 157.62 yen on Tuesday.
In recent months, the BOJ has been adjusting its monetary policy to address rising inflation. In March last year, it ended its negative interest rate policy, and by July, it had increased the short-term policy rate to 0.25%.
These measures aim to achieve a stable 2% inflation target, supported by robust wage growth and a weakening yen, which have contributed to higher import costs.
Despite these developments, the yen’s exchange rate against the U.S. dollar remained relatively stable, reflecting market skepticism about the likelihood of an imminent rate hike.
Analysts suggest that while the BOJ is signaling a shift towards policy normalization, uncertainties surrounding global economic conditions and domestic wage dynamics may lead to a cautious approach.
Barclays (LON:) expects the central bank to implement rate hikes in March and October, with a terminal rate of 0.75%.
The BOJ’s next policy meeting is scheduled for January 23-24, where new growth and price projections will be discussed.
Investing.com — UBS strategists expect the US dollar “to stay stronger for longer,” citing robust US economic activity and ongoing tariff concerns impacting other regions.
Monday saw the (DXY) soar to its highest level since November 2022, trading above the 110 mark during the session. This represents a roughly 9% appreciation since late September.
The US dollar’s recent strength has been bolstered by better-than-expected domestic data, including nonfarm payrolls and the services sector purchasing managers’ index. These positive indicators have led to a decrease in the anticipated number of Federal Reserve rate cuts this year, with the consequent rise in US yields lending broad support to the USD.
While US economic data is expected to remain solid in the near term, the outlook for Europe is less optimistic, with subdued growth prospects.
Although growth in China is forecasted to accelerate to 5% year-over-year for the fourth quarter, the threat of US tariffs poses a significant risk. Political and economic uncertainties in South Korea, the European Union, and the UK have been linked to weakness in their respective currencies.
According to UBS, potential monetary policy divergence is among the key factors that could further propel the dollar upward in the near term.
While the Fed is expected to cut rates by a total of 50 basis points in the second and third quarters, the European Central Bank is projected to reduce rates by 100 basis points in the first half of the year.
“Policy divergence is a powerful driver of currencies, which leads to trending FX markets and the potential for overshooting exchange rates,” strategists led by Mark Haefele wrote.
The firm also points out that tariff risks may not be fully accounted for in the current USD valuation. Despite the dollar’s recent rally being largely attributed to solid US macroeconomic data, the introduction of new tariffs could drive the dollar even higher.
UBS suggests that if tariffs are implemented, the DXY could trade between 110 and 115, with significant impacts on other major currency pairs.
“If tariffs were to materialize, DXY could trade in a 110-115 range, could drop below parity, could slide below 1.20, and could move toward 0.94, in our view,” strategists noted.
However, the investment bank believes that the story of 2025 could be a tale of two halves, with the dollar strength in the first half of the year potentially reversing in the second half.
The current trading position of the USD, which is considered strongly overvalued and shows the highest level of dollar net length since 2015, supports this view.
UBS’s revised forecasts for the EUR/USD pair reflect this expected trajectory. Strategists expect the pair to trade at 1.00 in March, 1.02 in June, and 1.06 in December 2025.
In the case of China, despite the possibility of dramatically higher effective tariff rates, the CNY has only partially priced in this risk, with UBS reiterating its forecast for the to reach 7.50 by June.
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