Forex
Dollar steady ahead of key job data; yuan weathers China outlook cut
© Reuters. U.S. Dollar and Chinese Yuan banknotes are seen in this illustration picture taken June 14, 2022. REUTERS/Florence Lo/Illustration/File Photo
By Amanda Cooper
LONDON (Reuters) -The U.S. dollar stood near a one-week high against a basket of currencies on Tuesday, ahead of a flurry of employment data that could upend investor expectations for the interest rate outlook.
The yuan held steady in the face of a downgrade to the outlook for China’s credit rating from Moody’s (NYSE:), as major state-owned banks stepped in to stem any slide by selling dollars.
The euro took a modest early knock from comments by European Central Bank member Isabel Schnabel, who said in an interview with Reuters that interest rate hikes were off the table, given the recent “remarkable” fall in inflation.
held close to its highest since April last year, near $42,000, as a decline in the dollar in recent weeks has diverted cash into riskier assets.
Investors are keenly awaiting Friday’s U.S. non-farm payrolls report for November. But before then, the monthly JOLTS report – which captures monthly hirings and firings – lands on Tuesday and the private-sector ADP survey is due on Wednesday.
Both could shape expectations for Friday’s number and make for volatile trading in the run-up, given the power of monetary policy expectations to drive currencies right now.
“The market’s main focus now is still very much on what central banks are going to do next year in terms of policy. We’ve had this very dramatic dovish repricing of rate expectations for both the Fed and the ECB over the past week, so that’s certainly having an impact on FX markets,” MUFG currency strategist Lee Hardman said.
The was up 0.15%, around one-week highs.
Analysts said the dollar’s nudge up was in part due to a reversal of the heavy selloff in recent weeks that stripped 3% off the dollar index in November alone, its steepest monthly decline in a year.
CUTS PRICED IN
Traders have priced in at least 125 basis points worth of rate cuts from the Federal Reserve next year, with a good chance of 50 bps by June, according to CME’s FedWatch tool.
“The Fed will be reactive to the hard data and not anticipatory of it,” said Thierry Wizman, Macquarie’s global foreign exchange and interest rates strategist. “So as long as the activity data deteriorates and inflation retreats, convergence toward lower yields will resume.”
By comparison, futures show there is an 82% chance the ECB could deliver its first rate cut by next March. Inflation across the euro zone has fallen more quickly than most anticipated, as evidenced by last Thursday’s consumer price data.
The euro has lost 1.34% since then and the data was enough to persuade ECB board member Schnabel to change her stance on rate cuts. A month ago, she had insisted hikes must remain an option.
The euro was last down 0.1% at $1.082 and down 0.1% against the pound at 85.72 pence.
The yuan held steady after Moody’s decision to cut China’s credit outlook to “negative” on Tuesday, thanks in part to state-owned banks that were seen swapping yuan for U.S. dollars in the onshore swap market and selling those dollars in the spot market, two sources with knowledge of the matter said.
The was broadly steady at 7.154 per dollar, having traded at 7.16 earlier on.
Sterling was little changed at $1.2624, while the yen was steady, leaving the dollar at 147.11.
The Australian dollar fell 0.9% to $0.6558, below Monday’s four-month high, after the Reserve Bank of Australia (RBA) kept rates at a 12-year high of 4.35% on Tuesday, as widely expected, and noted that economic data received since November had been broadly in line with forecasts.
In cryptocurrencies, bitcoin was down 0.5% at $41,777, narrowly below Monday’s peak of $42,404, its highest since April 2022.
The world’s largest cryptocurrency has gained 150% this year, fuelled in part by optimism that U.S. regulators will soon approve exchange-traded spot bitcoin funds (ETFs), which could open the bitcoin market to millions more investors.
“$40,000 has acted like a magnet since bitcoin finally broke through $30,000 in late October,” said crypto-services firm Nexo co-founder Antoni Trenchev. “It was only a matter of time before the next round number succumbed as enthusiasm about a spot ETF reaches fever pitch.”
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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