Chuck Mikołajczak
NEW YORK (Reuters) – The euro and Japanese yen strengthened on Thursday as the U.S. dollar stalled after rising to its highest level in almost three months and the dollar only briefly rebounded from earlier lows as data supported views of slower rate cuts interest rates by the Federal Reserve.
Weekly jobless claims fell to 227,000, below an estimate of 242,000 by economists polled by Reuters, while jobless claims rose to their highest level in almost three years. The Fed is likely to ignore an earlier augment in claims this month due to disruptions from Hurricane Helene.
A separate report by S&P Global said its preliminary US Composite PMI Output Index, which tracks the manufacturing and services sectors, rose to 54.3 this month from a final reading of 54.0 in September. A reading above 50 signals expansion.
The dollar has risen in 16 of the last 18 sessions, maintaining its pace of gains for a fourth straight week, as a spate of positive economic data muted expectations about the size and pace of the Fed’s interest rate cuts, which also lifted U.S. Treasury yields.
“We’re assuming profit-taking here,” said Joseph Trevisani, senior analyst at FXStreet in New York.
“But underneath that, of course, is a change in interest rates and a change in perception of what the Fed is going to do. And that hasn’t changed, so we’re kind of holding on for now.”
The yield on the benchmark 10-year U.S. bond fell 4.6 basis points to 4.196% after hitting 4.26% in the previous session, a three-month high.
The dollar rate, which measures the greenback against a basket of currencies, fell 0.37% to $104.05, its first decline after three straight sessions of gains, and the euro rose 0.39% to $1.0823, after as it hit a nearly four-month low of $1,076 on Wednesday.
The survey showed that economic activity in the euro zone came to a halt again last month, but the decline in Germany, Europe’s largest economy, was less edged than in the previous month.
Recent comments from Fed officials indicate that the central bank will gradually move to lower interest rates. Inflation pressures have eased but are still not back to where they should be, Beth Hammack, president of the Federal Reserve Bank of Cleveland, said Thursday.
According to CME’s FedWatch Tool, markets are pricing in a 95.1% chance of a 25 basis point cut at the Fed’s November meeting, with a 4.9% chance that the U.S. central bank will keep interest rates steady. The market was fully pricing in a cut of at least 25 bp a month ago, with a 58.2% chance of a 50 bp cut.
Meanwhile, expectations for faster and potentially larger interest rate cuts from the European Central Bank (ECB) have risen, weighing on the euro after many policymakers warned of the risk of overshooting the central bank’s 2% inflation target.
ECB policymaker Robert Holzmann said the central bank could cut interest rates by 25 basis points at its December meeting if circumstances, including inflation, allow. Latvian central bank governor Martins Kazaks said inflation could fall faster than expected but the ECB should stick to its practice of gradually cutting interest rates given the exceptional uncertainty.
The dollar also benefited from rising market expectations for next month’s victory of Republican candidate and former US President Donald Trump, which would likely lead to inflationary policies such as tariffs.
The pound sterling strengthened 0.39% to $1.2971. British Finance Minister Rachel Reeves said she would change the government’s measure of public debt in next week’s budget to allow more borrowing for investment.
Against the Japanese yen, the dollar weakened by 0.6% to 151.83.
BOJ Governor Kazuo Ueda said the yen’s recent decline was partly due to optimism about the U.S. economic outlook, and the central bank needs to take a closer look at whether that optimism will continue.
Polls ahead of Sunday’s elections showed that Japan’s coalition government, Prime Minister Shigeru Ishiba’s Liberal Democratic Party, may have difficulty maintaining a parliamentary majority, which could complicate the BOJ’s monetary policy plans.
