Forex
Fed’s drag on the dollar may soon peak: Barclays
Investing.com — As the U.S. Federal Reserve approaches a key turning point in its tightening cycle, the drag on the may soon reach its peak.
Analysts at Barclays suggest that, while further weakness in the dollar is possible, the worst of its depreciation is likely behind us.
The evolving outlook for U.S. monetary policy, coupled with global economic conditions, points to a more stable dollar in the months ahead, even as the Fed’s rate-cutting cycle begins.
Over the past several months, market participants have been increasingly pricing in the likelihood of earlier and faster rate cuts by the Fed. These expectations have been driven by the perception of a slowing U.S. economy and the Fed’s dovish shifts.
Real terminal rates, which reflect where the market expects the Fed’s tightening cycle to end, have dropped, from nearly 200 basis points earlier in the summer to under 50 basis points in recent weeks.
Despite this downward shift in rate expectations, Barclays analysts believe that most of the dollar’s depreciation has already occurred.
The , which tracks the dollar against a basket of major currencies, has seen a decline since mid-2023. However, the pace of further depreciation is expected to slow as the Fed’s monetary tightening cycle approaches its end.
“That said, the bulk of dollar weakness tends to occur ahead of the Fed easing cycles, and the move has already been chunky by historical standards,” the analysts said.
The dollar typically bottoms shortly after the first cut as the market begins to reassess the economic outlook. This pattern is playing out again, with the market already pricing in future cuts and causing the dollar to weaken accordingly.
Yet, as the rate-cutting cycle progresses, the market often corrects its expectations for the depth of the cuts. If the U.S. economy avoids a severe recession, the Fed may cut rates more cautiously than anticipated, which could lead to a stabilization or even a rebound in the dollar.
In milder economic slowdowns, the dollar tends to recover once the market realizes the Fed is not cutting as aggressively as feared.
Barclays underscores that several factors are likely to limit further dollar depreciation. One consideration is the possibility of a U.S. recession.
Should the economy tip into recession, the dollar may strengthen, as investors typically seek the safety of U.S. assets during times of global uncertainty.
In this risk-averse environment, the dollar’s safe-haven status could once again come into play, especially against emerging market currencies.
Additionally, geopolitical factors, including ongoing tensions in Europe and China, could provide support for the dollar.
Barclays points out that risks related to U.S.-China trade relations and concerns over European political stability could keep the dollar from weakening further.
The upcoming U.S. presidential election also raises the possibility of shifts in trade policy, which could introduce new volatility into global markets, indirectly supporting the dollar.
China’s economic slowdown presents another key factor. As China’s growth continues to falter, driven by a declining credit impulse and weakening consumption, the outlook for the Chinese remains bleak.
A weaker yuan could lend additional support to the dollar, particularly against Asian and emerging market currencies. Barclays notes that as China’s credit impulse weakens, it tends to correlate with a stronger dollar.
Barclays forecasts some additional USD depreciation in the near term, as the market continues to price in Fed rate cuts.
However, they expect that the extent of further weakness will be modest, with the bulk of the dollar’s decline already behind us.
As the Fed’s rate-cutting cycle progresses, the dollar may begin to recover, particularly if economic data points to a milder-than-expected downturn.
“Our new forecasts predict some further USD depreciation into Q4 24, but recovery thereafter,” the analysts said.
This recovery could be driven by a recalibration of market expectations regarding the Fed’s rate cuts, alongside improved global risk sentiment.
Barclays suggests that while bouts of volatility are still possible, the dollar’s broad downward trend may be nearing its end.
By Chuck Mikolajczak
NEW YORK (Reuters) -The dollar rose to a 13-month high in choppy trading on Thursday as investors assessed the latest labor market data and comments from Federal Reserve officials for the path of interest rates, while bitcoin continued its march toward the $100,000 level.
Weekly initial jobless claims dropped 6,000 to a seasonally adjusted 213,000, a seven-month low, and below the 220,000 estimate of economists polled by Reuters, indicating job growth rebounded after being disrupted by hurricanes and labor strikes last month.
However, the report also indicated labor market slack as it is taking longer for the unemployed to find new jobs, as unemployment rolls grew to their highest levels in three years, giving the Fed cushion to cut rates again in December.
continued its recent rally that has seen the cryptocurrency surge more than 40% since the U.S. election on expectations President-elect Donald Trump will loosen the regulatory environment for cryptocurrencies.
Bitcoin gained 4.23% to $98,458 after reaching a record high of $99,057. The Securities and Exchange Commission said Chair Gary Gensler, who challenged the crypto industry, will step down on Jan. 20.
Recent comments from Fed officials, including Chair Jerome Powell, have indicated the central bank may take a slower course in its rate cut path, while concerns that Trump’s policies could reignite inflation have helped push the dollar to a high of 107.15, its highest level since Oct. 4, 2023.
The , which measures the greenback against a basket of currencies, rose 0.39% to 107.03, with the euro down 0.64% at $1.0476 after falling to $1.0461, its lowest in 13 months.
“One could argue that the market is now pretty hawkishly priced, kind of the other side of the boat again, so it’s starting to look a little bit aggressive in some of the Fed pricing and probably in the Bank of England as well, but at the same time they are kind of talking very hawkishly lately,” said Brad Bechtel, global head of FX at Jefferies in New York.
“We’re just going to kind of chop around, there’s a lot embedded in the dollar price at current levels so I definitely wouldn’t be chasing it.”
European Central Bank chief economist Philip Lane said global economic output would suffer a “sizeable” loss if trade became more fragmented and an immediate boost to inflation would only fade over a few years.
Expectations for the path of rate cuts have been scaled back recently. Markets are pricing in a 55.9% chance of a 25-basis-point cut at the Fed’s December meeting, down from 72.2% a week ago, according to CME’s FedWatch Tool.
Federal Reserve Bank of New York President John Williams told Barron’s in an interview published on Thursday he sees inflation cooling and interest rates falling further while Federal Reserve Bank of Richmond President Tom Barkin said in an interview with the Financial Times the U.S. is more vulnerable to inflationary shocks than in the past.
In addition, Chicago Federal Reserve President Austan Goolsbee reiterated his support for further interest rate cuts and receptiveness to doing them more slowly.
Safe-haven currencies such as the Japanese yen and Swiss franc briefly strengthened on the latest potential signs of the conflict between Ukraine and Russia escalating before reversing course.
Against the Japanese yen, the dollar weakened 0.56% to 154.56 after dropping as much as 0.98%, and against the Swiss franc, the dollar gained 0.29% to 0.887 after falling as much as 0.21% on the session.
Bank of Japan Governor Kazuo Ueda said on Thursday the central bank would “seriously” take into account foreign exchange rate moves in compiling its economic and price forecasts.
By Amanda Cooper
LONDON (Reuters) – The pound eased modestly against the dollar, which held firm on Thursday, as investors remained laser-focused on who President-elect Donald Trump’s Treasury Secretary pick might be and what that might mean for his policies on growth, trade and taxes.
With the dollar in the ascendant, sterling wilted, last down 0.1% at $1.26405.
It’s risen 1.2% against the euro, which has come under intense pressure against the dollar in particular, as traders try to factor in the potential hit to euro zone growth from an aggressive stance on tariffs from the incoming Trump administration.
The pound got a brief lift the day before from data that showed UK consumer inflation staged an unwelcome pickup in October, confirming the belief in the market that the Bank of England will be one of the slowest among the big central banks to lower rates meaningfully over the coming year.
Even against that backdrop, sterling has fallen by close to 2% against the dollar this month and turned negative on the year.
Money markets currently show traders believe the BoE could lower rates by around 68 basis points by next December. For the Bank’s next meeting on Dec. 19, there’s no expectation of any move at all.
Commerzbank (ETR:) strategist Michael Pfister noted that there is barely a 50% chance priced in for a rate cut in February either.
“We still believe that the next rate cut will take place then. The argument in favour of this is that monetary policy is still likely to be seen as quite restrictive and policymakers will certainly want to avoid falling behind the curve,” he said.
He added that if inflation data shows a sustained pickup, the discussions around a February cut are “likely to intensify”.
Next (LON:) up on the macro calendar are preliminary surveys of business activity for November for the UK, the euro zone, the United States and elsewhere due on Friday.
The most recent Purchasing Managers’ Index (PMI) for October came in at 52 for Britain, above the 50 mark that separates growth from contraction and ranking the UK second behind the United States, which logged a reading of 54 last month.
Friday’s PMI is expected to come in at 51.8, according to a Reuters poll of economists.
Investing.com – The US dollar climbed to a new high Friday, while the euro slumped as data continued to illustrate the weak state of the eurozone economy.
At 05:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.6% higher to 107.614, after earlier climbing to its highest level since early October, 2023.
Dollar heads relentlessly higher
The dollar has gained some 3% so far this month in the wake of Donald Trump’s presidential election victory on expectations that his policies could reignite inflation and limit the Fed’s ability to cut rates.
The release of solid employment data on Thursday also helped the tone, as unexpectedly slowed.
“It was, however, some Fedspeak that likely encouraged dollar buying as New York Fed President John Williams – not usually a hawk – said the US is ‘not quite there yet’ on inflation and that the jobs market needs to cool further for easing,” said analysts at ING, in a note.
Markets now see a 57.8% chance of a 25-basis-point cut, down from 72.2% a week ago, according to CME’s FedWatch Tool.
The US currency’s safe haven status has also been a boon given the recent escalations in the conflict between Russia and Ukraine.
“Markets are clearly taking the escalation in the Russia-Ukraine war more seriously, which is favoring a broader rotation to haven assets like the dollar,” ING added.
Euro slips to two-year low
In Europe, traded 0.8% lower to 1.0389, falling to its lowest level in two years, with the single currency weighed by the region’s weak economic outlook as well as being buffeted by events in Ukraine this week.
Eurozone business activity took a surprisingly sharp turn for the worse this month as the bloc’s dominant services industry contracted and manufacturing sank deeper into recession, a survey showed on Friday.
The preliminary , compiled by S&P Global, sank to a 10-month low of 48.1 in November, below the 50 mark separating growth from contraction.
“The release has risen from being almost disregarded to a de-facto critical input for policy decision given the Governing Council’s greater focus on forward looking indicators of growth,” ING said.
Earlier in the session data showed that Germany’s , the largest in the eurozone, grew less than previously estimated in the third quarter, expanding by 0.1% in the third quarter of 2024, down from a preliminary reading of 0.2% growth.
fell 0.4% to 1.2536, falling to its weakest against the dollar since May, as British business output shrank for the first time in more than a year.
The preliminary S&P Global Flash , fell to 49.9 in November – below the significant 50.0 level for the first time in 13 months – from 51.8 in October.
Yen gains after Japanese CPI
fell 0.1% to 154.38, after Japanese inflation grew slightly more than expected in October, while the core measure rose above the central bank’s annual target band, keeping bets alive for another rate hike by the Bank of Japan.
climbed 0.2% to 7.2491, near a four-month high.
The yuan has depreciated as much as 1.8% against the dollar so far in November, as inadequate signals on Chinese stimulus measures also weighed on local markets.
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