Oct 15 2024: The U.S. dollar remained steady near its highest level in over two months on Tuesday, as traders bet that the Federal Reserve will proceed with a more gradual pace of interest rate cuts in the near future.
Recent U.S. economic data has indicated resilience, while September’s inflation data slightly exceeded expectations, leading traders to reduce expectations for further large rate cuts from the Fed. After an aggressive 50 basis point rate cut at the Fed’s last meeting in September, market sentiment has shifted toward more modest easing, bolstering the dollar.
Currently, traders are assigning an 89% probability of a 25 bps rate cut in November, with an overall 45 bps of easing anticipated for the year. The dollar index, which measures the currency against six major rivals, was at 103.19, just below the 103.36 peak reached on Monday, marking its highest point since August 8. The index rose following comments from influential Fed Governor Chris Waller, who urged caution on further rate cuts.
“The Fed repricing has been the primary driver of the dollar’s resurgence, especially in relation to other central banks,” said Francesco Pesole, FX strategist at ING. “Waller’s comments have further strengthened the dollar this week,” he added.
The euro continued to struggle, falling to $1.0885, its lowest since August 8, ahead of the European Central Bank (ECB) policy meeting on Thursday. The ECB is expected to deliver another interest rate cut, a move that seemed unlikely just last month.
Meanwhile, the British pound traded at $1.3075 after UK labor market data showed wage growth slowing to its lowest level in more than two years in the three months leading up to August. This slower pace of growth may pave the way for the Bank of England (BoE) to lower interest rates next month.
Expectations that inflation would keep the BoE on a gradual rate cut trajectory, similar to the Fed and ECB, had supported the pound for much of the year. However, shifting expectations have led to a decline, with the pound down over 2% against the dollar this month.
“Slowing wage growth is the key takeaway from today’s labor market data,” noted Jefferies economist Modupe Adegbembo, predicting a quarter-point rate cut next month.
Yen’s Weakness Pauses
The dollar’s recent strength has pushed the yen closer to 150 per dollar, particularly after dovish comments from Bank of Japan (BOJ) Governor Kazuo Ueda and opposition to rate hikes from Japan’s new Prime Minister, Shigeru Ishiba. This has raised doubts about when Japan’s central bank will tighten policy again. A slight majority of economists in a Reuters poll expect the BOJ to hold off on further rate hikes this year.
In early European trading, the yen was slightly stronger, trading at 149.07 per dollar, after touching a low of 149.98 on Monday, its weakest since August 1. The yen has lost 3.7% so far this month.
Oil-Linked Currencies Slip
Currencies of oil-exporting countries were weaker following reports that Israel would refrain from targeting Iranian oil, easing concerns of a Middle Eastern supply disruption. The Norwegian krone fell around 0.4% against both the euro and dollar, while the Canadian dollar slipped 0.1%.
Elsewhere, the Australian dollar dropped 0.2% to $0.6710, and the New Zealand dollar also fell 0.2%, to $0.6083.
China’s yuan, both onshore and offshore, weakened to a one-month low against the dollar on Tuesday.