Oct 8 2024: The U.S. dollar remained near seven-week highs against major currencies on Tuesday, as traders assessed the implications of last week’s strong U.S. jobs report, which tempered expectations for substantial rate cuts. Rising geopolitical tensions in the Middle East also contributed to a more cautious market sentiment, supporting the dollar’s strength.
Expectations for the Federal Reserve’s monetary easing have shifted dramatically this year. The market has now scaled back expectations of a rate cut in November, with the CME FedWatch tool indicating an 86% probability of a 25 basis point cut. By December, traders anticipate just 50 basis points of total easing, down from over 70 basis points expected just a week ago.
The dollar’s recent strength has pushed it to multi-week highs against the euro, British pound, and Japanese yen, though the yen regained some ground on Tuesday due to safe-haven buying driven by geopolitical concerns.
The dollar index, which tracks the greenback against a basket of major currencies, was last at 102.38, slightly below the seven-week high of 102.69 reached on Friday.
Kieran Williams, head of Asia FX at InTouch Capital Markets, noted that the dollar has benefited from a combination of a slower path for rate cuts, strong economic data, and the prospect of a “no landing” scenario, where the labor market remains robust even as inflation cools. However, he added that additional catalysts might be needed for the dollar to continue strengthening.
On Monday, Federal Reserve Bank of St. Louis President Alberto Musalem expressed support for further rate cuts as the economy remains on a healthy trajectory. He emphasized the need for the Fed to proceed cautiously, avoiding excessive monetary easing.
The benchmark 10-year U.S. Treasury yield stayed above 4% during Asian trading hours, having reached that level for the first time in two months on Monday as traders reduced their expectations for large rate cuts.
This week, investors are focusing on key economic reports, including the U.S. inflation data due on Thursday and the minutes from the Fed’s September meeting, which will be released on Wednesday.
Steve Boothe, a portfolio manager at T. Rowe Price, stated, “We don’t see recession conditions on the horizon and believe the economy is in relatively good shape despite the current slowdown. We expect the Fed to implement two more 25 basis point cuts this year, bringing the total to six by next year.”
Elsewhere, China’s stock markets reopened strongly after a week-long holiday but gave up some gains as optimism surrounding the country’s stimulus measures faded due to a lack of detailed plans. The yuan weakened slightly against the dollar, with the onshore yuan slipping to 7.0635 per dollar.
The euro was trading at $1.09865, not far from last week’s seven-week low of $1.09515, while the British pound stood at $1.3094, near its three-week low of $1.30595 from Monday.
The yen traded slightly stronger at 148.07 per dollar after hitting a seven-week low of 149.10 on Monday. Traders continue to speculate on the Bank of Japan’s next moves following comments from new Prime Minister Shigeru Ishiba, who surprised markets by suggesting that Japan’s economy is not yet ready for rate hikes—a reversal from his earlier support for ending the Bank of Japan’s ultra-loose monetary policy.
In other currencies, the Australian dollar dropped to its lowest level since September 16, reaching $0.6715, following dovish-sounding minutes from the latest Reserve Bank of Australia meeting and waning momentum in Chinese stocks. The Aussie last traded down 0.24% at $0.6742.
The New Zealand dollar was steady at $0.6127 ahead of the Reserve Bank of New Zealand’s policy decision on Wednesday. A recent Reuters poll showed most economists expecting a 50 basis point rate cut.