December 6, 2023
Dollar falls to two-month low as markets eye Fed cuts

US dollar and euro banknotes are visible in this illustration taken on July 17, 2022. Reuters/Dado Ruvik/Illustration/File Photo Get licensing rights

SINGAPORE, Nov 20 (Reuters) – The dollar slipped to a two-month low on Monday, extending last week’s downward trend as traders reaffirmed their belief that U.S. rates have peaked and turned their attention to… When can the Federal Reserve start cutting rates?

The yuan hit a three-month high in both onshore and offshore markets on support from China’s central bank, while the Australian dollar also hit a three-month high against a falling greenback.

The dollar index fell to 103.64 in Asia trading, its weakest level since Sept. 1, extending its decline from last week to nearly 2% — the sharpest weekly decline since July.

After US economic indicators came in weaker than expected last week, the market has sensed the risk of further interest rate hikes from the Fed, especially after the inflation forecast was lower than expected.

The focus is now on how soon the first rate cut could happen, with futures pricing putting a 30% chance that the Fed could start lowering rates as early as next March, according to the CME FedWatch tool.

“Market pricing for FOMC policy is likely to remain fairly stable, so the dollar should have very few catalysts to move it this week,” said Carol Kong, currency strategist at Commonwealth Bank of Australia (CBA). “If we see an improvement in risk appetite again, the dollar could certainly weaken further.”

The euro hit a two-month high of $1.0924 against a weaker dollar, ahead of flash PMI readings in the euro zone later this week.

Sterling was last up 0.1% at $1.2475.

Minutes from the Fed’s latest meeting are also due this week, which will add some color to policymakers’ thinking after they kept rates steady for the second time earlier this month.

“The FOMC minutes could be framed as a ‘Fed pivot,’ leading to buying in risk assets as well as soft US Treasury yields and favoring the US dollar,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank. “Risk-on rallies may be understated.” ,

“The result is that the FOMC minutes may overstate the likelihood of incremental dovish changes and the Fed’s intended pivot signals.”

The decline in the greenback provided some relief to the Japanese yen, which was at a strong level of 150 per dollar and eventually rose 0.4% to 149 per dollar.

The risk-sensitive Australian dollar rose about 0.5% to $0.6546, its strongest level since August, while the New Zealand dollar rose 0.52% to $0.60235.

In Asia, China on Monday left its benchmark lending rates unchanged at a monthly fixing, matching expectations, as the weaker yuan continued to limit monetary easing and policymakers looked to watch the effects of previous stimulus on credit demand. looked forward to.

The yuan gained some support after the country’s central bank set the currency’s midpoint at its strongest level since Aug. 11.

The onshore yuan rose 0.5% to a more than three-month high of 7.1753 per dollar, while the offshore yuan got a similar boost and jumped about 0.6% to more than three-month high of 7.1745 per dollar.

The yuan, which has fallen about 4% against the dollar in the onshore market this year, is under pressure due to China’s faltering economic recovery and investor sentiment remains fragile.

“I think the theme of a moderate Chinese economic recovery will persist for some time,” CBA’s Kong said.

“Unless we get a more meaningful recovery in the Chinese economy, I think it will be a headwind for the (yuan), the Aussie and the Kiwi in the near term.”

Reporting by Rai V. Editing by Sam Holmes

Our Standards: The Thomson Reuters Trust Principles.

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