Samuel Indyk and Ankur Banerjee
LONDON (Reuters) – The U.S. dollar rose near its highest level in more than two months against major currencies on Tuesday, buoyed by bets that the Federal Reserve will make moderate interest rate cuts in the near future.
A raft of US data showed the economy was resilient, with inflation rising slightly more than expected in September, prompting investors to reduce bets on further immense Fed rate cuts.
The US central bank started its monetary easing cycle with an aggressive 50 basis point move at its last policy meeting in September, but market expectations have shifted towards a slower pace of cuts, which has strengthened the dollar.
Traders currently estimate that there is an 89% chance of a 25 basis point rate cut in November, with the overall valuation for this year being 45 basis points.
The index, which measures the U.S. currency against six rivals, was at 103.19, just above 103.36, the highest level since Aug. 8 it reached on Monday, and rose after influential Fed Governor Chris Waller called for “more caution ” on interest rate cuts further.
The Fed’s revaluation “was the main driver of the dollar’s recovery, especially compared to other central banks,” said Francesco Pesole, currency strategist at ING.
“Waller’s comments contributed to the strengthening of the dollar this week,” Pesole added.
The euro lagged, hitting its lowest level since Aug. 8 at $1.0885 ahead of Thursday’s European Central Bank meeting, where the central bank is likely to make another interest rate cut, something that may have seemed unlikely at its last meeting in September.
The pound gained $1.3075 after British labor market data showed wages rose at the slowest pace in more than two years in the three months to August, a pace that should allow the Bank of England to cut interest rates next month.
Expectations that stiff inflation will keep the BoE on a path of gradual interest rate cuts compared to peers – the Fed and ECB – have underpinned the pound’s sturdy performance this year, but betting changes have seen it fall in recent weeks, with the pound falling by more than 2 % against the dollar for the month.
“A slowdown in wages should be the main takeaway from today’s labor market data,” said Jefferies economist Modupe Adegbembo, who expects a quarter-point cut next month.
The weakening of the yen is decreasing
The rise in the U.S. currency pushed the yen back toward 150 per dollar, especially after a dovish shift in rhetoric from Bank of Japan Governor Kazuo Ueda and up-to-date Prime Minister Shigeru Ishiba’s surprising opposition to further interest rate increases.
That raises questions about when Japan’s central bank will tighten policy again, with a slim majority of economists in a Reuters poll expecting the BoJ not to forego an interest rate hike again this year.
The yen, however, was slightly stronger in early European trading at 149.07 per dollar, after falling to 149.98 on Monday, the weakest level since August 1. The yen has fallen 3.7% this month.
Oil-exporting currencies weakened after prices fell sharply following media reports that Israel was unwilling to hit Iranian oil targets, reducing fears of supply disruptions in the Middle East.
The Norwegian krone lost about 0.4% against both the euro and the dollar, while the Canadian dollar fell 0.1%.
Meanwhile, the Australian dollar fell 0.2% to $0.6710, while the New Zealand dollar fell 0.2% to $0.6083.
both onshore and offshore weakened on Tuesday to its lowest level in a month against the dollar. [CNY/]
