Hannah Lang
NEW YORK (Reuters) – The dollar posted its best weekly performance in a month on Friday as investors priced in the possibility of a slower rate cut by the Federal Reserve next year, while sterling fell after a surprise decline in economic activity in Britain.
The US currency also rose against the yen on reports that the Bank of Japan may abandon an interest rate hike at its meeting next week.
The index, which measures the currency against six others, was up 0.037% at 107, marking a weekly gain of almost 1%, the biggest in a month.
Thursday’s U.S. data showed the labor market gradually cooling as expected, and producer price inflation helped reinforce the current market scenario of a Fed cutting interest rates on December 18 but a slower pace of cuts in 2025.
Markets fully expect a cut at the upcoming meeting, but are pricing in only about a 24% chance of another cut in January, with the most likely time for another move being March, according to CME’s FedWatch tool.
“I think there will probably be a long pause from the Fed, perhaps through the first quarter of the year, and then maybe just a gradual cut in interest rates here and there as the central bank tries to refine its policy,” said Matt Weller, head of research market at StoneX.
San Francisco Fed President Mary Daly, for example, said this month that she had no objection to cutting interest rates in December but recommended a “more thoughtful and cautious approach” to further cuts.
The dollar rose 0.69% to 153.695 yen, the highest since tardy November. The yen performed the worst this week against the dollar, gaining 2% against the Japanese currency.
Traders see only a 23% chance of a quarter-percentage-point BOJ hike on December 19, following reports from Reuters and Bloomberg that indicated officials have abandoned tightening monetary policy this time to wait for more evidence of wage growth and to see how U.S. policy is taking shape under up-to-date President Donald Trump.
“While the outcome is uncertain, one thing is clear: A hike of more than 15 basis points would likely trigger a downward move in the dollar/yen relationship as the yen strengthens,” said City Index market analyst David Scutt.
“On the other hand, if the BOJ keeps interest rates unchanged, there is a good chance of a knee-jerk reaction upwards.”
EUROPE UNDER PRESSURE
In Europe, the pound fell after data showed the British economy unexpectedly contracted in October, deepening signs of a larger-than-expected slowdown. The Office for National Statistics said the economy contracted by 0.1% in October, compared with forecasts in a Reuters poll for growth of 0.1%.
Sterling was last down 0.45% at $1.2616, near its lowest level since the beginning of the month.
The euro recovered from earlier losses against the dollar and rose 0.26% to $1.04945. The European Central Bank cut interest rates by 25 basis points on Thursday, leaving the door open to further easing.
The Swiss franc remained under pressure after the central bank’s shock half-point interest rate cut a day earlier. The Swiss franc has recently remained almost constant at 0.89265 francs.
Interest rate cuts and the threat of U.S. tariffs pushed the Canadian dollar to its lowest level in 4.5 years. [CAD/]
In the offshore market it remains at 7.281 per dollar. Reuters reported this week that China is considering allowing its currency to fall further to counter the effects of any US trade war.
