Oct 7 2024: The dollar extended its rally on Monday, buoyed by strong U.S. employment data and escalating conflict in the Middle East, while major currencies, including Japan’s yen, struggled to keep pace.
The yen slipped to 149.10 per dollar, its weakest level since mid-August, before recovering slightly to trade around 148.40. Last week, the yen dropped over 4%, marking its largest weekly decline since early 2009.
The U.S. dollar’s strength followed a robust jobs report, which showed the largest increase in employment in six months, a drop in unemployment, and solid wage growth in September. These signs of a resilient U.S. economy led markets to dial back expectations for aggressive Federal Reserve rate cuts.
“With rate cuts still in the discussion, combined with positive earnings expectations and China ramping up liquidity and fiscal efforts, the U.S. dollar and equity markets received a boost,” said Chris Weston, head of research at Pepperstone. He also noted that despite geopolitical risks and potential energy supply shocks, market sentiment remained optimistic heading into the new trading week.
In the latest developments in the Middle East, Israel carried out airstrikes on Hezbollah positions in Lebanon and Gaza ahead of the anniversary of the October 7 attacks, which triggered the ongoing conflict. Israel’s defense minister reiterated that all options remain open for retaliation against Iran.
Brent crude futures dipped by 0.4% on Monday but saw an 8% increase last week—the biggest weekly rise since January 2023.
The dollar index, which measures the greenback against a basket of major currencies, held steady after climbing 0.5% on Friday to a seven-week high. It recorded more than a 2% gain for the week, its largest in two years. The euro slipped slightly to $1.0970, down 0.06%.
The yen’s recent underperformance was partly attributed to remarks from Japan’s new prime minister, Shigeru Ishiba, which dampened expectations for imminent rate hikes in Japan.
U.S. 10-year Treasury yields stood at 3.97%, near their two-month high. Yields had dipped earlier in the week as investors sought safe-haven Treasuries following Iran’s missile attacks on Israel.
Market expectations now overwhelmingly favor a 25 basis point rate cut by the Federal Reserve in November, as opposed to a larger 50 basis point cut. According to the CME’s FedWatch tool, there is now a 98% chance of a quarter-point reduction, up from 47% just a week ago.
“Dollar-yen will likely remain between 145-149 in the coming weeks, with reduced expectations for a larger Fed rate cut in November and a dovish stance from Japan’s PM ahead of the October 27 general election, assuming Middle East tensions don’t escalate,” said Ryota Abe, an economist at SMBC in Singapore.
Elsewhere, the British pound held steady at $1.3122, still recovering from last week’s 1.9% decline, its sharpest drop since early 2023. Bank of England Chief Economist Huw Pill stated that rate cuts should be gradual, though Governor Andrew Bailey suggested the central bank may act more swiftly to lower borrowing costs.
The New Zealand dollar edged up 0.1% to $0.6166 after a week-long decline, as markets await the Reserve Bank of New Zealand’s policy decision on Wednesday. The central bank is expected to deliver a 50 basis point rate cut as it continues to ease from its 15-year high rates.
