Dollar Strengthens Amid Fed Rate Cut Speculation and BOJ Meeting
By Hannah Lang
The dollar is on track for its best weekly performance in a month as investors anticipate the Federal Reserve’s rate-cutting strategy for next year. Meanwhile, sterling faces a setback following an unexpected contraction in UK economic activity. Let’s dive into the latest developments shaping the global currency markets.
Federal Reserve Expectations
- The US dollar is up against the yen amid reports suggesting the Bank of Japan may delay a rate hike at its upcoming meeting.
- The US Dollar Index, which measures the currency against six others, is set for a substantial weekly gain of nearly 1%, marking its most significant increase in a month.
Market Insights
- Recent US data indicates a gradual cooling in the job market, reinforcing expectations of a Fed rate cut on December 18. However, the market anticipates a slower pace of reductions in 2025.
- According to CME’s FedWatch tool, while markets foresee a cut at the upcoming meeting, the probability of another cut in January stands at roughly 24%, with March being the most likely timeframe for further action.
Expert Analysis
"I think there will likely be a long pause, perhaps for all of the first quarter of the year from the Fed and then maybe just an incremental interest rate cut here and there as the central bank tries to refine its policy," said Matt Weller, head of market research at StoneX.
BOJ Meeting Dynamics
- Traders see a mere 23% chance of a quarter-point hike by the Bank of Japan on December 19, with officials possibly postponing tightening to assess wage growth and US policy under incoming president Donald Trump.
- City Index market analyst David Scutt pointed out that a substantial rate hike by the BOJ could trigger a downside move in dollar/yen, while keeping rates unchanged might lead to a positive uptick.
European Market Shifts
- The pound faced a drop after UK economic data revealed an unexpected contraction in October, signaling a more significant slowdown than anticipated.
- The euro rebounded against the dollar following the European Central Bank’s rate cut and its willingness to consider further easing measures.
Global Currency Dynamics
- The Swiss franc experienced pressure after the central bank’s surprise rate reduction, while Canada’s dollar remains at a 4-1/2 year low due to rate cuts and US tariff threats.
- The offshore market saw the Chinese yuan holding at 7.281 per dollar, with reports suggesting China may allow its currency to depreciate further in response to a potential US trade war.
The global currency markets are experiencing significant shifts and uncertainties, reflecting the intricate interplay between central bank decisions, economic data, and geopolitical factors. Stay tuned for more updates on how these developments could impact your financial investments and future planning.