Forex
Dollar rebounds as Fed’s Williams talks down rate cuts
© Reuters. A currency dealer counts U.S. dollars at his shop in Karachi October 8, 2008. REUTERS/Athar Hussain/Files
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By Karen Brettell
NEW YORK (Reuters) -The dollar rebounded on Friday after Federal Reserve Bank of New York President John Williams pushed back against the market’s rate cut expectations, though the remained on track for its worst weekly performance in a month.
The dollar tumbled broadly after updated interest rate projections of Fed officials released on Wednesday showed an expectation for 75 basis points in cuts in 2024.
Fed Chairman Jerome Powell was also interpreted as striking a more dovish tone at the conclusion of the U.S. central bank’s two day meeting, when he said that the tightening of monetary policy is likely over, with a discussion of cuts coming “into view.”
But Williams said on Friday that “we aren’t really talking about rate cuts right now” at the Fed and it’s “premature” to speculate about them.
“It strikes some of the similar tones that we heard from Powell earlier this week but it kind of reinforces the fact that the Fed is still very much a data dependent bank and not really endorsing what the market’s pricing in to a degree,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto.
Rai also noted that a large part of the move in the dollar this week has been due to rebalancing positions that were heavily tilted towards the greenback and focused in specific currency pairs, such as against the Japanese yen.
“This is a story about the inordinate amount of leverage and skewed positioning in the market that needed to be rebalanced more than any sort of dovish interpretation of what Powell said earlier this week,” he said.
Traders are pricing in aggressive expectations for rate cuts, with the first reduction seen likely in March and 141 basis points in cuts seen by December.
Atlanta Fed President Raphael Bostic said on Friday that the U.S. central bank can begin reducing interest rates “sometime in the third quarter” of 2024 if inflation falls as expected.
Chicago Fed President Austan Goolsbee also said that the Fed may soon need to shift its focus to preventing a run-up in unemployment from fighting inflation.
Data on Friday showed that production at U.S. factories rose in November, lifted by a rebound in motor vehicle output following the end of strikes, but activity was weaker elsewhere as manufacturing grapples with higher borrowing and softening demand for goods.
The dollar index was last up 0.56% on the day at 102.52. It fell to 101.76 on Thursday, the lowest since Aug. 10. The index is on track for a weekly loss of 1.39%, the worst weekly performance since Nov. 19.
The euro fell 0.83% to $1.0899. It reached $1.1009 on Thursday, the highest since Nov. 29. Sterling dropped 0.60% to $1.2690, after reaching $1.2793 on Thursday, the highest since Aug. 22.
The euro and sterling were supported on Thursday by the European Central Bank (ECB) and Bank of England pushing back against rate cuts.
Investors are nonetheless still betting heavily on rate cuts from both central banks next year.
The ECB has more scope than most to ease, according to Pepperstone strategist Chris Weston, given low euro zone growth and a rapid decline in inflation.
“However, the pushback from (ECB President) Lagarde and co suggests conjecture on the timing of initial easing – perhaps this is a function that it’s desirable to keep one’s currency strong to limit imported inflation.”
The euro was also dented by surveys on Friday showing that the downturn in euro zone business activity surprisingly deepened in December.
The Bank of Japan is the last of the major central banks to meet this month and the question among traders and investors is whether or not it will signal its intention to ditch its policy of keeping interest rates at rock bottom next week.
The dollar was last up 0.24% at 142.18 yen, after dropping to 140.95 on Thursday, the lowest since July 31. The greenback is on track to post its worst week against the Japanese currency since July 14 with a 1.94% fall.
fell 2.1% to $42,130.
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Currency bid prices at 3:00PM (2000 GMT)
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
Previous Change
Session
Dollar index 102.5200 101.9700 +0.56% -0.937% +102.6400 +101.8300
Euro/Dollar $1.0899 $1.0992 -0.83% +1.73% +$1.1004 +$1.0885
Dollar/Yen 142.1750 141.8450 +0.24% +8.44% +142.4600 +141.4500
Euro/Yen 154.97 155.98 -0.65% +10.46% +156.4900 +154.4200
Dollar/Swiss 0.8700 0.8677 +0.28% -5.90% +0.8707 +0.8654
Sterling/Dollar $1.2690 $1.2767 -0.60% +4.93% +$1.2790 +$1.2669
Dollar/Canadian 1.3371 1.3407 -0.27% -1.32% +1.3415 +1.3350
Aussie/Dollar $0.6706 $0.6698 +0.12% -1.62% +$0.6728 +$0.6664
Euro/Swiss 0.9481 0.9535 -0.57% -4.18% +0.9541 +0.9456
Euro/Sterling 0.8587 0.8610 -0.27% -2.91% +0.8617 +0.8572
NZ $0.6209 $0.6207 +0.03% -2.21% +$0.6229 +$0.6180
Dollar/Dollar
Dollar/Norway 10.4570 10.5020 -0.31% +6.67% +10.5610 +10.4340
Euro/Norway 11.4013 11.5451 -1.25% +8.65% +11.5634 +11.3840
Dollar/Sweden 10.2654 10.2330 -0.56% -1.37% +10.3235 +10.2057
Euro/Sweden 11.1897 11.2527 -0.56% +0.36% +11.2789 +11.1810
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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