by Alden Bentley
NEW YORK/LONDON (Reuters) – The U.S. dollar strengthened on Wednesday ahead of the release of data on the Federal Reserve’s September decision to cut interest rates by 50 basis points, reflecting confidence that the central bank will not continue to ease as aggressively.
Concerns about demand from China have been a major theme throughout the week amid disappointment with the results of last month’s stimulus measures. The currencies of Australia and New Zealand were hit particularly tough on Wednesday.
While the minutes from the latest Federal Open Market Committee meeting may show how scorching the debate over a larger-than-expected cut was, they will be a bit off after solid nonfarm payrolls data last Friday caused markets to re-price the short-term rate Fed lower expectations.
The euro extended its recent selloff to a two-month low against the dollar, and was last down 0.26% at $1.0953. The dollar-yen rate rose 0.61%, matching Monday’s high of 149.10, the highest since August 16.
The yen has suffered a shock since fresh Japanese Prime Minister Shigeru Ishiba, known for his criticism of loose monetary policy, surprised markets with recent remarks that the country was not ready for further interest rate increases.
Ishiba set early elections for Oct. 27, ahead of the Bank of Japan’s October monetary policy meeting and the U.S. presidential election scheduled for Nov. 5.
The dollar rate, which measures the greenback against a basket of currencies including the yen and euro, rose to its highest level since Aug. 16 and strengthened 0.26% at 102.76.
Traders are also watching Wednesday’s parade of Fed speakers and preparing for Thursday’s release of the September Consumer Price Index.
“And now the most important thing, tomorrow we will know the CPI. “I think China’s announcement that the Ministry of Finance will make another announcement on Saturday is important,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. “Though we don’t see much of an effect in the dollar block today.”
Looking at the term structure of federal funds futures, investors see about an 88% chance of a 25 basis point cut at the November meeting and about 50 basis points more by the end of the year, according to LSEG calculations.
Federal Reserve Bank of Dallas President Lorie Logan said Wednesday that she supports last month’s too-big rate cut but wants smaller cuts in the future given the “still real” risk of rising inflation and “substantial uncertainty” about economic prospects.
Later, Chicago Fed President Austan Goolsbee, Richmond Fed President Thomas Barkin, Fed Vice President Philip Jefferson, and, after the Fed closed, Boston Fed President Susan Collins and San Francisco Fed President Mary Daly, were also included in the case files.
China’s Ministry of Finance on Wednesday held a press conference on fiscal policy for Saturday, raising expectations for fiscal stimulus, a day after a press conference held by state planner the National Development and Reform Commission disappointed markets by providing no details on fresh stimulus.
However, it didn’t facilitate much for the currency, which fell 0.36% against the US dollar to USD 0.6721. The yuan weakened to 7.0810 per dollar.
The New Zealand dollar saw one of its biggest moves on Wednesday after the Reserve Bank of New Zealand cut interest rates by 50 basis points,
The stock fell 1.14% to $0.6069 and hit its lowest level in almost two months
“We see growing unfavorable factors (for the New Zealand dollar versus the US dollar) in the near term, including a hawkish Fed repricing, potential geopolitical escalation, risk reduction ahead of the US elections, exhausted trade momentum, and now a more dovish-than-expected RBNZ.” – said Lenny Jin, global currency strategist at HSBC.
“Potentially strong fiscal stimulus from China is an upside risk, but (the Australian dollar) will certainly benefit more.”
