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Dollar hugs 13-month peak as market awaits next Fed cue

Reuters: The pound eased modestly against the dollar, which held firm on Thursday, as investors remained laser-focused on who President-elect Donald Trump's Treasury Secretary pick might be and what that might mean for his policies on growth, trade and taxes. With the dollar in the ascendant, sterling wilted, last down 0.1% at $1.26405. It's risen 1.2% against the euro, which has come under intense pressure against the dollar in particular, as traders try to factor in the potential hit to euro zone growth from an aggressive stance on tariffs from the incoming Trump administration.

The pound got a brief lift the day before from data that showed UK consumer inflation staged an unwelcome pickup in October, confirming the belief in the market that the Bank of England will be one of the slowest among the big central banks to lower rates meaningfully over the coming year. Even against that backdrop, sterling has fallen by close to 2% against the dollar this month and turned negative on the year. Money markets currently show traders believe the BoE could lower rates by around 68 basis points by next December. For the Bank's next meeting on Dec. 19, there's no expectation of any move at all.

Commerzbank strategist Michael Pfister noted that there is barely a 50% chance priced in for a rate cut in February either. "We still believe that the next rate cut will take place then. The argument in favour of this is that monetary policy is still likely to be seen as quite restrictive and policymakers will certainly want to avoid falling behind the curve," he said. He added that if inflation data shows a sustained pickup, the discussions around a February cut are "likely to intensify".

Next up on the macro calendar are preliminary surveys of business activity for November for the UK, the euro zone, the United States and elsewhere due on Friday. The most recent Purchasing Managers' Index for October came in at 52 for Britain, above the 50 mark that separates growth from contraction and ranking the UK second behind the United States, which logged a reading of 54 last month. Friday's PMI is expected to come in at 51.8, according to a Reuters poll of economists.

Reuters: The U.S. dollar stuck close to a 13-month high on Friday as investors assessed the outlook for the Federal Reserve's interest rate path and uncertainty in Europe kept the euro on the back foot, while bitcoin eyed the $100,000 level. The yen, meanwhile, held its ground against the greenback after domestic core inflation figures remained above the Bank of Japan's 2% target in a sign conditions for further interest rate hikes were falling in place. The dollar index edged down 0.05% to 107.01, not far off Thursday's one-year high of 107.15, its highest level since Oct. 4, 2023, with little data this week to dent its march higher.

Data overnight showed U.S. weekly initial jobless claims unexpectedly dropped to a seven-month low but also indicated some slack as it is taking longer for the unemployed to find new jobs, giving the Fed cushion to cut rates again in December. Global PMIs are due later in the day, although those figures should not "change the dial too much," said Tony Sycamore, market analyst at IG. "It's just trying now to find what the catalysts are and it's obviously going to be does the Fed cut or not again" in December, Sycamore said. U.S. PCE for October scheduled for release next Friday will be the focus.

The dollar has rallied around 3% so far this month on expectations that U.S. President-elect Donald Trump's policies could reignite inflation and limit the Fed's ability to cut rates. Recent comments from Fed officials, including Chair Jerome Powell, have indicated the central bank may take a slower course in its rate cut path. Expectations for the path of rate cuts have been scaled back recently, but remain somewhat volatile. Markets are pricing in a 57.8% chance of a 25-basis-point cut at the Fed's December meeting, down from 72.2% a week ago, according to CME's FedWatch Tool.

Among Trump policies on weighing on investors' minds were the president-elect's campaign pledges of tariffs, with Europe and China both likely in the firing line. But factors such as the scale and sequencing of the incoming president's policies remain an unknown, and likely will not come to light until after Trump is inaugurated in January. The euro, which makes up a hefty portion of the dollar index, steadied at $1.0475 after falling to a 13-month low of $1.0461 on Thursday.

The euro has been one of the main casualties of the dollar's post-election ascent. Recent escalations between Russia and Ukraine and political uncertainty as Germany, the bloc's biggest economy, have further weighed. Sterling traded at $1.25915 , up 0.03% so far on the day. Bitcoin had the $100,000 mark in its line of sight, holding flat at $98,080.92 after reaching a record high of $99,057 on Thursday. The cryptocurrency has surged more than 40% since the U.S. election on expectations Trump will loosen the regulatory environment for cryptocurrencies.

The Japanese yen, which had been pushed back below 156 per dollar last week, received a boost as Japan's core inflation in October held above the central bank's 2% target to come in 2.3% higher from a year earlier, data showed on Friday. "The renewed strengthening of underlying inflation coupled with the recent rebound in consumer spending and the renewed weakening of the yen strengthen the case for another BOJ rate hike next month," Marcel Thieliant, head of Asia-Pacific at Capital Economics, wrote in a research note. 

The dollar was last down 0.17% on the day at 154.27 yen. BOJ Governor Kazuo Ueda on Thursday said that the bank will scrutinise data ahead its rate review next month, and "seriously" take into account the impact yen moves could have on the economic and price outlook.

Reuters: South Africa's rand firmed on Thursday after the central bank opted for another small cut to its main interest, quashing hopes of a bigger move. South Africa's central bank lowered its main rate by 25 basis points to 7.75%, as expected by economists polled by Reuters. Data released on Wednesday showed inflation had dropped below the central bank's 3% to 6% target range, which boosted analyst bets of a potentially steeper reduction. But central bank Governor Lesetja Kganyago said a 50 bps cut was not discussed and played up global risks and domestic price pressures.

At 1602 GMT, the rand traded at 18.0425 against the dollar, about 0.4% stronger than its previous close. "A 50bp move was never really on the cards, as the SARB was always going to look beyond the sharp slowdown in inflation evident in yesterday's CPI data and focus more on new price risks that are emerging," said Danny Greeff, co-head of Africa at ETM Analytics. Greeff said that the central bank was unlikely to turn less cautious while there was still much uncertainty around U.S. President-elect Donald Trump's policy proposals and what effect they would have on inflation. 

On the stock market, the Top-40 index closed 0.2% up. South Africa's benchmark 2030 government bond was stronger, the yield down 7 basis points at 8.975%.

Reuters: Gold was headed for its largest weekly gain in nearly eight months on Friday and the euro hovered at a 13-month low as Russia lowered its threshold for using nuclear weapons and fired a hypersonic ballistic missile at Ukraine. The risk of escalation also sent European gas prices to a one-year high and pushed investors towards safe havens, underpinning German debt and putting the Swiss franc on course for its first weekly rise in two months. In Asia on Friday, chipmakers led stocks a little higher after Nvidia touched a record high in U.S. trade on solid earnings, with shares in Taiwan and South Korea up more than 1% and the Nikkei gaining 0.8%.

Gold was steady at $2,677 an ounce and up more than 4.5% for the week so far while bitcoin, stood on the brink of breaking above $100,000 for the first time. Assets linked to Adani Group companies remained under pressure, with dollar bonds nursing losses following chairman Gautam Adani's indictment for fraud by U.S. prosecutors. Russia on Tuesday lowered its threshold for using nuclear weapons and overnight responded to the U.S. and UK allowing Kyiv to strike Russian territory with western weapons by firing a hypersonic intermediate-range missile at Ukraine's Dnipro.

"Those weapons typically carry nuclear warheads," said analysts at ANZ Bank, noting the attack sent oil prices higher. "The exchange indicates the war has entered a new phase, raising concerns around disruptions to supply." Brent crude futures are up nearly 4.5% on the week and edged up to touch a two-week high of $74.44 a barrel in Asia trade. The euro has been friendless and down for seven of the past eight weeks as Europe faces U.S. tariffs, slowing growth, the collapse of Germany's government and strains in France's government over its 2025 budget.

"There doesn't seem to be anything on the plus side of the euro ledger just at the moment," said National Australia Bank's head of FX research, Ray Attrill. At $1.0469 the common currency is close to breaking support at last year's low of $1.0448. European stocks are also headed for a fifth weekly drop in a row, while world stocks are up 1% this week. The dollar index eyed a weekly gain of 0.4% and traded at 107.05. S&P 500 futures were flat. Benchmark 10-year Treasury yields held at 4.432%, more or less steady on the week.

Markets imply about a 58% chance of a Fed cut, down from 83% a week earlier. Data in Japan showed core inflation held above the central bank's 2% target in October, keeping pressure for a rate rise. Markets are pricing about a 57% chance of a 25 basis point Bank of Japan rate hike in December and the prospect has injected some volatility and even support for the yen. The yen, down 4% this quarter, was trading firmer at 154.38 per dollar in morning trade. "Together with speculation about finance ministry intervention, I think selling on upticks on dollar/yen is quite decent," said Keita Matsumoto, head of financial institution sales and solutions at Citigroup Global Markets Japan in Tokyo. "Our investor clients and corporate clients are rather sellers of dollar/yen close to 155."

Currency markets never sleep, and news moves fast.

Global economic commentary

Friday, 22 November 2024 ∙ 8 min

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