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Dollar shakes off weakness after investors rethink Fed outlook

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Dollar shakes off weakness after investors rethink Fed outlook
© Reuters. U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Amanda Cooper

LONDON (Reuters) -The dollar edged up on Wednesday after its biggest drop in a year the day before when cooler U.S. inflation data added to investor conviction that the Federal Reserve may not raise rates again, while the pound fell after slower UK inflation figures.

Tuesday’s steep drop in the dollar was sparked by data showing U.S. consumer prices were unchanged in October, with the annual rise in underlying inflation the smallest in two years. In the 12 months through October, the CPI climbed 3.2% – below economists’ estimates – after rising 3.7% in September.

Monthly retail sales data is due at 1330 GMT and is expected to show U.S. consumer spending fell 0.3% in October from September, which would mark the first monthly contraction since March this year.

Investors have all but wiped out the chance of another rate hike from the Fed in December, while bets of a rate cut in May next year increased to around 50%, according to the CME Group’s FedWatch Tool.

In Britain, inflation eased to its slowest pace in two years in October, which prompted a reassessment of the outlook for Bank of England policy and dented sterling.

“For me what this does concern, is we’re done, when it comes to rate hikes and it’s a question of when do rate cuts come and that’s what markets are staring to price, particularly if you look at the bond market,” CMC Markets (LON:) chief market strategist Michael Hewson said.

The , which measures the performance of the U.S. currency against six others, was up 0.16% at 104.26, not far from Tuesday’s two-month low of 103.98.

The pound eased back from Tuesday’s two-month highs after data showed British inflation ran at its slowest pace in two years in October, at 4.6%. This was below forecasts for a reading of 4.8% and below September’s 6.7% reading.

Sterling was last down 0.3% at $1.2463. On Tuesday, the pound rose by 1.8% against the dollar, marking its biggest one-day gain in a year.

The euro eased 0.3% to $1.0848 after touching its highest since August the previous day.

The dollar/yen pair was flat at 150.42, after data showed Japan’s economy contracted in July-September, complicating the central bank’s efforts to ease out of its ultra-easy monetary policy. On Monday, the yen hit a one-year low close to 152.

Still, Moh Siong Sim, currency strategist at the Bank of Singapore, sees softer U.S. yields and the risk of intervention by the Japanese government limiting the likelihood of the yen weakening much further than it already has.

Between those factors and a Fed which is likely to retain a somewhat hawkish tone, dollar/yen is a “range-bound story for the time being,” he said.

The dollar was knocked back from the 152 level on Monday, after a routine options expiry unleashed some profit-taking that took the yen to around 151.20.

LSEG data shows Wednesday’s New York expiry has around $3.9 billion in open interest between 150.50 and 152, with $2.6 billion at 152 alone, which might create more volatility.

The offshore , meanwhile, received some support The , meanwhile, briefly ticked up to a three-month high of $7.2385 against the dollar after domestic industrial output and retail sales growth beat expectations.

Evidence of ongoing weakness in China’s property sector, where data showed sales fell faster in October and investment in real estate slumped, took some of the shine off the rally.

The offshore yuan was at 7.2484 per dollar, flat on the day.

Forex

Dollar edges higher as Fed rates view sets direction

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By Chuck Mikolajczak

NEW YORK (Reuters) -The dollar edged higher on Tuesday in thin holiday trading as the expected slower path of interest rate cuts from the U.S. Federal Reserve compared with other global central banks continued to command market direction.

The greenback has jumped more than 7% since the end of September, powered in part by growing expectations the U.S. economy will see accelerated growth under policies from President-elect Donald Trump, while sticky inflation has dampened expectations on how aggressive the Fed will be in reducing interest rates.

Those expectations for the U.S. stand in contrast to growth forecasts and the interest rate views for other global economies and central banks, which have led to expanding interest rate differentials.

The Fed last week projected a more measured path of rate cuts than the market had been anticipating, providing another boost to U.S. Treasury yields, with the benchmark 10-year note yield reaching a 7-month high of 4.629% on Tuesday.

“The markets are all having a little bit of a Christmas bonus with the election and they’re expecting positive things,” said Joseph Trevisani, senior analyst at FX Street in New York.

“Certainly that’s true for the dollar because we’ve seen a pullback in the expectations for further rate cuts, and as we all know, the most important factor for the currency markets is the rate structure between the central banks.”

The , which measures the greenback against a basket of currencies, rose 0.14% to 108.24, with the euro down 0.15% at $1.0389. The index is on track for its fifth gain in the past six sessions.

Trading volumes are likely to be thin through next week as the year draws to a close, with the economic calendar very light, and analysts expect rates to be the main driver for the foreign exchange market until the U.S. employment report on Jan. 10.

Sterling weakened 0.06% to $1.2527.

Against the yen, the dollar strengthened 0.1% to 157.34 as the Japanese currency remains near levels that have recently prompted Japanese authorities to intervene in an effort to support it.

© Reuters. FILE PHOTO: U.S. Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File photo

Minutes from the Bank of Japan’s meeting last week showed policymakers agreed in October to keep raising interest rates if the economy moves in line with their forecast, but some stressed the need for caution on uncertainty over U.S. economic policy.

Trump’s return to the White House has brought about uncertainty over how his expected policies for tariffs, lower taxes and immigration curbs might affect policy.

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Forex

Dollar retains strength; euro near two-year low

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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. 

 

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Forex

Asia FX muted, dollar recovers as markets look to slower rate cuts

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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.

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