Authors: Kevin Buckland and Sruthi Shankar
TOKYO (Reuters) – The dollar fell to a three-week low against the yen on Monday but halted a recent decline against most other currencies as investors weighed the prospect of the Federal Reserve imminently beginning a series of interest rate cuts.
The dollar fell 0.7% to 143.45 yen, its lowest level since Aug. 5. It was last down 0.2%.
The dollar strengthened slightly against the euro and sterling after hitting up-to-date multi-month lows on Friday, when Federal Reserve Chairman Jerome Powell backed an imminent start to interest rate cuts.
Traders were also closely monitoring the fallout from escalating tensions in the Middle East, which sent oil prices up almost 3%. [O/R]
In a much-anticipated speech at the annual economic conference in Jackson Hole, Wyoming, Powell said “the time has come for policy to adjust,” prompting traders to seal bets on a 25 basis point (bp) rate cut in September and even raise expectations for a significant 50 bp rate cut.
“Powell didn’t say anything new, but he did formally confirm some things that markets had been pricing in, including the idea of a cut and a shift in focus from inflation to the labor market,” said Samy Chaar, chief economist at Lombard Odier in Geneva.
However, he did not expect the dollar to weaken significantly in the brief term.
“A huge weakening of the dollar at this point would indicate that the market is not pricing in enough cuts, which I think is a bit of an exaggeration,” Chaar added.
– which measures the currency against a basket of six major pairs – rose to 100.82, off a 13-month low of 100.60 reached slow last week. Trading activity was expected to be lighter than usual as markets in Britain were closed for a public holiday.
JEN STILL STRONG
In a move to support the yen, Bank of Japan Governor Kazuo Ueda on Friday reaffirmed his determination to raise interest rates if inflation remains at a sustainable rate of 2%.
Many market participants had expected Ueda to take a less hawkish tone at a special session of parliament, convened amid criticism that a surprise interest rate hike by the Bank of Japan last month had helped to quickly extinguish bearish bets on the yen and an aggressive sell-off in Japanese stocks.
The US currency was trading near a 13-month low against the euro and was trading closer to levels last seen in March 2022 against sterling, with comments from Bank of England Governor Andrew Bailey that it was “too early to declare victory” over inflation suggesting a less aggressive approach to cutting interest rates than the Federal Reserve.
The pound weakened 0.2% to $1.3190 after rising to $1.32295 on Friday for the first time in 17 months.
Reuters sources said ECB policymakers were preparing to cut interest rates again on September 12. The euro fell 0.2% to $1.1167, but was not far from a session high of $1.1205 last seen in July last year.
The Swiss franc rose to 0.8475 per dollar, its highest level since August 5.
Elsewhere, the Australian dollar weakened 0.4% to $0.6768, but was still not far from Friday’s peak of $0.6799, its highest since July 11.
