By Kevin Buckland
In a significant turn of events, the dollar has hit its lowest point this year against the euro, raising concerns among traders awaiting potential revisions to U.S. payrolls data later today. This decline comes ahead of a highly anticipated speech by Federal Reserve Chair Jerome Powell at the end of the week.
The U.S. currency has also slipped below the crucial 145 yen level and is dangerously close to the more-than-one-year low against the sterling, which was reached overnight.
One of the key drivers of this downward spiral has been the plummeting U.S. bond yields, which have reached their lowest point since August 5. This drop in yields was triggered by unexpectedly soft monthly jobs figures earlier this month, sparking fears of a looming recession.
Chris Weston, head of research at Pepperstone, highlighted the impact of the reduced yield premium in the U.S. Treasury market on the declining dollar. He stated, “As we can see in so many USD pairs of late, the USD just can’t find a friend in the market and is in free fall.”
The initial weak monthly payrolls report at the beginning of August led to a surge in volatility across various asset classes. Market participants are now bracing themselves for potential shocks with revised data set to be released later today.
Following the Aug. 2 payrolls report, traders rushed to adjust their expectations, with the implied probability of a half percentage point interest rate cut by the Fed increasing to about 71%. However, recent positive macroeconomic data has shifted the odds, with a quarter-point cut now being favored by 72% and a larger reduction by 28%.
All eyes are now on Powell’s upcoming keynote address at the Kansas City Fed’s Jackson Hole economic symposium on Friday. Investors will be closely analyzing his speech for clues on the size of the anticipated rate cut next month and the likelihood of further reductions in borrowing costs at subsequent Fed meetings.
The Dollar Index, which measures the currency against major rivals such as the euro, sterling, and yen, dropped to its lowest level since January 2 at 101.30 before recovering slightly to 101.48.
Meanwhile, the euro surged to $1.1132, the highest since December 28, before retracting to $1.1118. Sterling held steady at $1.3027, slightly weaker from the previous day.
Against the Japanese yen, the dollar experienced volatility, falling to 144.945 yen at one point before bouncing back to 145.75 yen.
Traders are eagerly anticipating a special session of Japan’s parliament on Friday to scrutinize the Bank of Japan’s recent decision to raise interest rates unexpectedly. BOJ Governor Kazuo Ueda’s testimony will be closely watched for insights following the central bank’s sudden shift to a more hawkish stance.
Looking ahead, SMBC economist Ryota Abe predicts a weaker dollar against the yen by the end of next year, with expectations of stability in 2024. He emphasized the importance of the Fed’s rate-cutting pace in determining the future movements of the currency pair.
As volatility remains high, economists in a recent Reuters poll anticipate another rate hike by the BOJ this year, with December being the favored month for such a move.
Amidst these developments, Australia’s dollar hovers just below a one-month high, while New Zealand’s dollar reaches its highest point since July but retreats slightly.
It is crucial for investors to stay informed about these market dynamics and upcoming events to make sound financial decisions in the current economic climate.
