Authors: Medha Singh and Ankur Banerjee
LONDON (Reuters) – The dollar weakened from near seven-week highs against major currencies on Tuesday after investors assessed the prospects for U.S. interest rate cuts, even as conflict in the Middle East continues to escalate the currency’s appeal as a secure haven.
The euro rose 0.1% to $1.098575, not far from the seven-week low of $1.09515 hit last week. The pound rose 0.1% to $1.31005 after hitting a three-week low of $1.30595 on Monday.
Traders have drastically changed their expectations for monetary easing from the US Federal Reserve this year. Last week’s robust jobs report gave credence to Fed Chairman Jerome Powell’s comments that the central bank would stick to its usual quarter-percentage-point rate cuts after starting the monetary easing cycle with a large cut in September.
“Much of the dollar re-adjustment is based on the assumption that the Fed is not going to make 50 basis point cuts any time soon,” said Nick Rees, senior FX analyst at Monex Europe.
“We are no longer worried that the United States will fall into a recession this year.”
Federal Reserve Bank of New York President John Williams, a regular voice on the Fed’s rate-setting committee, echoed Powell’s comments, telling the Financial Times that he did not see September’s move “as a rule for how we proceed going forward.”
MARKET PRICES
As CME’s FedWatch tool showed, markets are no longer fully pricing in an interest rate cut in November and are assigning about a 90% chance to a 25 basis point cut. Only 50bp of easing is priced in by December, down from over 70bp a week earlier.
This helped the currency reach multi-week highs against the euro, sterling and yen. However, the yen pared some of its losses on Tuesday as rising geopolitical concerns prompted investors to flee to safe-haven assets.
The index, which measures the U.S. currency against major rivals, fell 0.1% to 102.38.
“We could see another rise in the US dollar on CPI towards the end of the week and a further correction to some of the Fed rhetoric becoming a bit more hawkish,” added Monex Europe’s Rees.
This week, investors’ attention will focus on the US inflation report, due on Thursday, and the minutes of the Fed’s September meeting, due on Wednesday.
“If soft enough, Thursday’s CPI update could ultimately help (un)calm the nerves of Fed dovishness and prevent the U.S. dollar from entering a medium-term bullish consolidation zone against many major markets,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“If not, the November price cut could take hold, and that would mean higher yields, an overall stronger U.S. dollar, weaker other currencies and some negative pressure on stock valuations.”
The benchmark remained above 4%, reaching that level on Monday for the first time in two months as investors scaled back bets on large rate cuts. [US/]
Meanwhile, the Chinese yuan fell against the dollar and stocks returned to a robust opening after a week-long holiday break, but ended the session well at their highs as optimism over stimulus measures faded somewhat due to a lack of details.
The rate weakened to 7.0552 per dollar.
The yen rose 0.2% to 147.87 per dollar after falling to a seven-week low of 149.10 on Monday as comments from fresh Japanese Prime Minister Shigeru Ishiba raised questions about how aggressive the BOJ will be in raising rates interest rates in the near future.
Ishiba stunned markets last week when he said the economy was not ready for further interest rate increases, a stark change from his previous support for the BOJ in easing decades of extreme monetary stimulus.
Elsewhere, the Australian dollar fell to its lowest level since September 16 at $0.6715 after minutes from the country’s latest central bank meeting sounded slightly dovish. It was last down 0.4% at $0.67345.
