USD Weakens Against Euro and Sterling as Fed Signals Rate Cuts
By Kevin Buckland
The dollar traded near the lowest in more than a year against the euro and sterling on Thursday as a dovish Federal Reserve and fresh signs of weakness in the U.S. job market backed the case for interest rate cuts.
The dollar sagged below the closely watched 145 yen mark after U.S. Treasury yields slid overnight, ahead of weekly jobless claims data later in the day and a hotly anticipated speech by Fed Chair Jerome Powell at the central bank’s annual Jackson Hole symposium on Friday.
The Dollar Index, which measures the currency against the euro, sterling, yen and three other major peers, was little changed at 101.19 as of 0452 GMT. It dipped to 100.92 on Wednesday for the first time this year.
The euro was off slightly at $1.1143 after gaining to $1.11735 on Wednesday for the first time since July 2023.
Sterling eased to $1.3084 after climbing to $1.31195 in the previous session, also a level last seen in July 2023.
Fed officials last month were strongly leaning toward an interest rate cut at their September policy meeting and several of them would have even been willing to reduce borrowing costs immediately, according to the minutes of their July 30-31 gathering released on Wednesday.
Meanwhile, employers added far fewer jobs than originally reported in the year through March, according to a Labor Department report released the same day.
Traders now price in a 38% probability of a 50 basis point (bp) cut at the Fed’s Sept. 17-18 meeting, up from 33% a day earlier, and a 62% chance of a 25 bp reduction, according to the CME Group’s (NASDAQ:) FedWatch Tool.
Powell gives the keynote speech in Jackson Hole on Friday, and markets are hungry for any hints on the likely size of a cut next month, and whether borrowing costs are likely to be lowered at each subsequent policy meeting.
“Markets sense the USD has more downside as Fed easing nears,” National Australia Bank (OTC:) strategists led by head of FX strategy Ray Attrill wrote in a research report, projecting the euro to establish a new, higher range of $1.10-$1.15.
“Whether the Fed cuts by 25 or 50 bps on Sep 18 is less important for the USD than that it does kick off an easing cycle next month.”
The dollar slipped 0.11% to 145.095 yen after earlier sliding as low as 144.86 yen.
Traders are hoping for more clarity on the path for Japanese monetary policy after conflicting signals from Bank of Japan Governor Kazuo Ueda and influential Deputy Governor Shinichi Uchida in recent weeks.
Ueda will testify on Friday in a special session of parliament that will scrutinize the BOJ’s decision to unexpectedly raise rates at the end of last month.
The central bank chief’s hawkish stance helped spur a rapid unwind of bearish yen positions and a violent sell-off in Japanese stocks. Just days later, Uchida injected some calm back to markets by saying policy wouldn’t be tightened in periods of volatility.
“With the Dollar Index having largely recovered losses, Ueda may comfortably maintain his stance that further rate hikes could still be needed if forecasts are attained, while underscoring that financial stability will be a factor in policy considerations too,” DBS analysts wrote in a note.
Australia’s risk-sensitive dollar dropped 0.19% to $0.67315, slipping back from Wednesday’s five-week high of $0.6761, amid a mixed performance for Asia-Pacific stocks on Thursday.
The Chinese yuan traded slightly stronger at 7.1292 per dollar in offshore markets, but off from Wednesday’s high of 7.1135.
In cryptocurrencies, bitcoin eased 0.8% to $60,735.