Oct 1 2024: The U.S. dollar firmed against major currencies on Tuesday after Federal Reserve Chair Jerome Powell tempered expectations of more aggressive interest rate cuts.
The yen remained stable, staying within its recent trading range against the dollar, following two volatile days as traders assessed Japan’s new prime minister and his cabinet. Meanwhile, Australia’s dollar moved closer to Monday’s high, supported by positive domestic retail sales data.
During a speech at a conference in Tennessee, Powell took a more hawkish stance, signaling that the Federal Reserve would likely continue with smaller, quarter-percentage-point rate cuts. “This is not a committee that feels in a hurry to cut rates quickly,” Powell remarked.
Although traders are confident that the Fed will cut rates again at its November meeting, expectations for a larger 50 basis-point (bps) cut fell to 35.4% from 53.3% the previous day, according to CME Group’s FedWatch Tool.
Matt Simpson, senior market analyst at City Index, commented, “The door isn’t fully closed on a 50 bps cut if economic data deteriorates, but Powell seems to believe markets are overly optimistic about future cuts.” The Fed initiated its easing cycle last month with an unexpected half-point reduction.
Powell’s comments come ahead of key U.S. economic data releases this week, including the Institute for Supply Management’s manufacturing index on Tuesday, non-manufacturing data on Thursday, and Friday’s critical monthly jobs report. Strong results from these reports could provide a “decent bounce” for the dollar before it resumes its downward trend, according to Simpson.
The dollar index rose by 0.1% to 100.82 at 04:03 GMT, after gaining 0.3% on Monday. The greenback also climbed 0.45% against the yen, reaching 144.27 yen.
Shigeru Ishiba, expected to be confirmed as Japan’s new prime minister later on Tuesday, is regarded as a monetary policy hawk, despite softening his stance on policy normalization. Ishiba won his party’s leadership race on Friday and is working to unify the party ahead of a snap general election on October 27.
Minutes from the Bank of Japan’s September meeting revealed that policymakers expressed caution about near-term interest rate hikes, which had little effect on the market. Andy Ji, senior Asia FX strategist at InTouch Capital Markets, noted, “With Kishida out and Ishiba in, it looks like policy continuity is ensured, meaning the BOJ’s dovish stance is likely to continue.”
In Europe, the euro remained near Monday’s one-week low after German inflation dropped to its lowest level since early 2021, fueling speculation of another rate cut this month. The euro was stable at $1.1136, having dipped to $1.1113 in the previous session.
