Authors: Ankur Banerjee and Stefano Rebaudo
(Reuters) – The dollar hovered near a seven-month low on Tuesday, on bets that the U.S. central bank will start cutting interest rates next month, with investors awaiting comments from Federal Reserve Chairman Jerome Powell on Friday.
Dollar weakness lifted the euro to its strongest level this year, while sterling hovered near a one-month high. MSCI’s emerging-market currency index also hit a record high.
The Swedish krona weakened after the central bank cut interest rates by 25 basis points (bps) and announced two or three more monetary easing measures in 2024. It was last down 0.33% at 10.27 against the U.S. dollar.
The spotlight this week will be on Powell’s speech at the annual meeting of central bankers in Jackson Hole, but the spotlight will also be on the minutes of the latest Federal Reserve meeting, due to be released on Wednesday.
Some analysts say the coming weeks will likely prove crucial to whether the Fed cuts rates by 50-75 basis points this year or by 150 basis points or more. The Jackson Hole conference is the first opportunity for the Fed to fend off the chance of a 50-basis-point cut at one of its three remaining meetings this year, they say.
While a deterioration in the labor market has led to expectations of a larger rate cut in September, the data since then has been mixed, with upbeat retail sales data suggesting consumer demand remains resilient.
Still, the U.S. economy remains “vulnerable to recession in the event of a financial shock,” said Thierry Wizman, global foreign exchange and interest rate strategist at Macquarie.
“But that financial shock may not come,” he added. “In that case, we could remain below-trend and look like a ‘peak’ until the Fed eases policy enough.”
Markets are pricing in a 24.5% chance of a 50-bps cut in September, down from 50% a week ago, with a 25-bps cut having a 75.5% chance, the CME FedWatch tool showed. Traders are pricing in a total of 93 bps cuts this year.
A slim majority of economists polled by Reuters expect the Fed to cut rates by 25 basis points at each of its remaining three meetings.
The euro last hit $1.1077 on Tuesday, reaching $1.1087, its highest since early trading on Dec. 28. The common currency has risen 2.4% this month, heading for its strongest monthly performance since November.
which measures the U.S. currency’s value against six rivals, last stood at 101.86 after hitting its lowest level since Jan. 2 of 101.76 on Tuesday. The index fell more than 2% in August and is on track for a second straight month in the red.
Expectations of a US interest rate cut also helped push the Australian and New Zealand dollars near their monthly highs.
UEDA EXPECTED
The Japanese yen weakened slightly to 146.98 per dollar, still close to a two-week high reached in the previous session but away from a seven-month high of 141.675 reached in early August.
Tokyo’s intervention early last month and a surprise interest rate hike pulled the yen back from a 38-year low of 161.96 where it had been stuck in early July, surprising investors who sharply reduced their holdings of the yen.
Investors’ attention will be focused on Bank of Japan Governor Kazuo Ueda when he appears in parliament on Friday. Ueda is expected to discuss the BOJ’s decision last month to raise interest rates, with the focus on whether he will stick to his recent hawkish tone.
Claudio Wewel, a strategist at Bank J. Safra Sarasin, said the pace of the yen’s appreciation would likely be more gradual as data showed most of the speculative tiny positions had already been settled.
The latest weekly data to August 13 showed leveraged funds (usually hedge funds and various types of fund managers) have unwound their long-standing tiny yen position and are now net-long for the first time since March 2021.
Barclays recalled that monthly data showed retail investors halved their net tiny positions in the US dollar/yen pair in July as the yen strengthened amid renewed expectations for a BOJ rate hike.
