Forex

Dollar soft, yen strong as bets firm on aggressive Fed rate cut

Published

4 months ago

September 16, 2024

By Vidya Ranganathan and Samuel Indyk

LONDON (Reuters) -The dollar was lower on Monday while the yen hit its highest level in more than a year, as market participants increasingly expected an oversized rate cut by the Federal Reserve later this week.

The dollar traded at 140.01 yen at 1140 GMT, after falling to as low as 139.58 yen in the session.

This represented a further drop from the 140.285 end-December low it struck on Friday to levels last seen in July 2023.

The Fed’s Sept. 17-18 meeting is the highlight of a busy week that also has the Bank of England and Bank of Japan announcing policy decisions on Thursday and Friday, respectively.

Fed speakers and data releases over the past month have had markets shifting the odds around the size of this week’s rate cut, debating whether the Fed will head off weakness in the labour market with aggressive cuts or take a slower wait-and-see approach.

Futures markets were fully pricing a quarter-point cut from the Fed on Wednesday, with around a 60% chance they opt for a larger 50 basis point move. Last week, the chances of a larger move stood at about 15%.

“It’s all about the Fed and the question about whether it will be a big 50 basis point cut or a smaller 25 basis one,” said Niels Christensen, chief analyst at Nordea. “That’s why the dollar is softer across the board.”

The , which measures the currency against six peers, was down 0.3% to 100.69.

Treasury yields have been falling in the run-up to the highly anticipated Fed meeting, particularly as odds stack up for the Fed to get aggressive with a half-point rate cut.

Benchmark 10-year yields are down 30 basis points in about two weeks. Two-year yields, more closely linked to monetary policy expectations, were around 3.55% and down from roughly 3.94% two weeks ago.

Selling the dollar for yen has been the cleanest trade for investors looking to play the drop in Treasury yields, said Chris Weston, head of research at Australian online broker Pepperstone.

“While speculators are short and riding this lower, this trend is clearly one to align with,” he said.

Investors are also looking to the Bank of Japan’s interest rate decision on Friday, when it is expected to keep its short-term policy rate target steady at 0.25%, having raised rates twice already this year.

BOJ board members have indicated they are keen to see rates higher, and the narrowing gap between rates in Japan and other major currencies has spurred the yen higher and caused billions of dollars worth of yen-funded carry trades to be unwound.

“We are expecting higher rates in Japan and lower rates in the U.S., so the interest rate differential is favouring a stronger yen against the dollar,” Nordea’s Christensen said.

Sterling rose 0.6% to $1.3199. The euro was up 0.4% at $1.1120.

The European Central Bank cut interest rates by 25 bps last week, but ECB President Christine Lagarde dampened expectations for another reduction in borrowing costs next month.

The ECB should almost certainly wait until December before cutting interest rates again to be certain it is not making a policy mistake in easing too quickly, ECB Governing Council member Peter Kazimir said on Monday.

The Bank of England is expected to hold its key interest rate at 5% on Thursday, after kicking off its easing with a 25-bp reduction in August. Futures markets were pricing in around a 38% chance of a quarter-point rate cut on Thursday, versus a 20% chance on Friday.

Bank of Canada Governor Tiff Macklem meanwhile opened the door to stepping up the pace of interest rate cuts, the Financial Times reported on Sunday. The BoC, after keeping its key policy rate at 5%, a more than two-decade high, for a year, has trimmed it by a quarter point three times in a row since June.

The U.S. dollar was little changed against its Canadian counterpart at C$1.3581.

Forex

Dollar now priced for perfection – BoA Securities

Published

3 hours ago

January 8, 2025

Investing.com – The US dollar has rallied strongly since the US Presidential election, from an already high level, and Bank of America Securities sees the currency now priced to perfection.

In real effective terms, BoA estimated that the dollar ended 2024 at a 55-year high, following the longest uptrend in recent decades, which started in mid-2011.

“The USD has also reached extreme levels in nominal terms. Using the BIS NEER broad index (nominal effective exchange rate), the USD is the strongest it has been in the last 30 years, which is when the time series started,” said analysts at BoA Securities, in a note dated Jan. 8.

The dollar appears overvalued by 18.5%, the most in the last 30 years except when it was overvalued by 19% during the energy shocks from the war in Ukraine in 2022, the bank said.

Its overvaluation increased by about 6.4% since the end of Q3 last year, to a large extent because of the US election. By comparison, it was overvalued only by 9.4% at the end of 2016, after Trump won his first US election.

Looking at G10 equilibrium estimates, the USD clearly stands out as the most overvalued – followed by CHF, with JPY and the Scandies being the most undervalued.

“We expect the USD to remain strong in the short term on the back of US inflationary policies, and particularly tariffs, but to weaken later in the year, as these policies take a toll on the US economy while the rest of the world responds. Policy uncertainty makes our baseline subject to substantial risks,” said BoA Securities.

Forex

Dollar boosted by rising Treasury yields; euro slips on weak data

Published

3 hours ago

January 8, 2025

Investing.com – The US dollar rose Wednesday, benefiting from rising bond yields after the release of healthy US economic data, while weak German industrial orders weighed on the euro.

At 04:35 ET (09:35 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher to 108.690.

Dollar gains as Treasury yields soar

The dollar has continued to push ahead Wednesday, following on from the prior session’s positive tone after data showed US unexpectedly rose in November, layoffs were low, while services sector activity accelerated in December and a measure of prices paid for inputs hit a two-year high.

This resulted in 10-year Treasury yields climbing to an eight-month high, while the benchmark 30-year yield came close to the 5% level.

“Yesterday’s US data releases were hawkish for the Fed, and the implied probability of a March rate cut has now dropped below 40%,” said analysts at ING, in a note.

“The most remarkable print was the ISM prices paid subcomponent, which spiked to the highest level since January 2023. If a generally resilient economy was already accounted for when the Fed met in December, a resurgence in inflation concerns could drive an even further hawkish tuning in the policy message.”

The Federal Reserve cut the number of rate cuts it sees this year to two at its December meeting, but traders are now only pricing in around 37 bps of easing through this year, according to LSEG data.

There is more data to digest Wednesday, in the form of the monthly and weekly , ahead of Friday’s release of the closely watched US for further clarity on the health of the world’s largest economy.

German economic weakness weighs on euro

In Europe, fell 0.2% to 1.0326, adding to the losses of around 0.5% overnight after the release of more disappointing economic data from the region’s largest economy – Germany.

fell 5.4% in November, sapped by a decline in large orders, while the country’s fell 0.6%, bursting hopes for a boost from pre-Christmas promotions like Black Friday and Cyber Monday.

Investors are currently looking for the to ease interest rates by around 100 basis points in the first half of 2025.

“There is only a speech by French central bank governor Villeroy to watch in the eurozone calendar today. EUR/USD may find decent support at 1.0300 for now,” said ING.

traded 0.2% lower to 1.2447, with little in the way of economic data due for release Wednesday, and only a speech from Bank of England Deputy Governor Sam Woods to digest.

The held interest rates unchanged last month, and is expected to proceed cautiously with further rate cuts this year with inflation still above target.

Yuan sentiment remains weak

In Asia, rose 0.1% to 7.3511, with the Chinese currency hitting its weakest level in 17 years earlier in the week.

Sentiment remains weak surrounding China ahead of President-elect Donald Trump’s inauguration on Jan. 20, with Trump having vowed to impose steep trade tariffs on China.

gained 0.1% to 158.19, after recovering marginally from its weakest level in nearly six months.

The yen stemmed its recent losses after government officials offered a verbal warning on potential currency market intervention, which saw traders adopt more caution in shorting the Japanese currency.

Forex

Dollar strengthens on elevated US bond yields, tariff talks

Published

3 hours ago

January 8, 2025

By Tom Westbrook and Greta Rosen Fondahn

SINGAPORE/GDANSK (Reuters) -The dollar rose for a second day on Wednesday on higher U.S. bond yields, sending other major currencies to multi-month lows, with a report that Donald Trump was mulling emergency measures to allow for a new tariff program also lending support.

The already-firm dollar climbed higher on Wednesday after CNN reported that President-elect Trump is considering declaring a national economic emergency as legal justification for a large swath of universal tariffs on allies and adversaries.

The was last up 0.5% at 109.24, not far from the two-year peak of 109.58 it hit last week.

Its gains were broad-based, with the euro down 0.43% at $1.0293 and Britain’s pound under particular pressure, down 1.09% at $1.2342.

Data on Tuesday showed U.S. job openings unexpectedly rose in November and layoffs were low, while a separate survey showed U.S. services sector activity accelerated in December and a measure of input prices hit a two-year high – a possible inflation warning.

Bond markets reacted by sending 10-year Treasury yields up more than eight basis points on Tuesday, with the yield climbing to 4.728% on Wednesday.

“We’re getting very strong U.S. numbers… which has rates going up,” said Bart Wakabayashi, Tokyo branch manager at State Street (NYSE:), pushing expectations of Fed rate cuts out to the northern summer or beyond.

“There’s even the discussion about, will they cut, or may they even hike? The narrative has changed quite significantly.”

Markets are now pricing in just 36 basis points of easing from the Fed this year, with a first cut in July.

U.S. private payrolls data due later in the session will be eyed for further clues on the likely path of U.S. rates.

Traders are jittery ahead of key U.S. labour data on Friday and the inauguration of Donald Trump on Jan. 20, with his second U.S. presidency expected to begin with a flurry of policy announcements and executive orders.

The move in the pound drew particular attention, as it came alongside a sharp sell-off in British stocks and government bonds. The 10-year gilt yield is at its highest since 2008. [GB/]

Higher yields in general are more likely to lead to a stronger currency, but not in this case.

“With a non-data driven rise in yields that is not driven by any positive news – and the trigger seems to be inflation concern in the U.S., and Treasuries are selling off – the correlation inverts,” said Francesco Pesole, currency analyst at ING.

“That doesn’t happen for every currency, but the pound remains more sensitive than most other currencies to a rise in yields, likely because there’s still this lack of confidence in the sustainability of budget measures.”

Markets did not welcome the budget from Britain’s new Labour government late last year.

Elsewhere, the yen sagged close to the 160 per dollar level that drew intervention last year, touching 158.55, its weakest on the dollar for nearly six months.

Japan’s consumer sentiment deteriorated in December, a government survey showed, casting doubt on the central bank’s view that solid household spending will underpin the economy and justify a rise in interest rates.

hit 7.3322 per dollar, the lowest level since September 2023.