Written by Ray Wee
SINGAPORE (Reuters) – The New Zealand dollar made strong gains on Thursday following a positive survey of business expectations, while the U.S. dollar failed to sustain its recovery in the run-up to a key U.S. inflation reading at the end of the week.
Friday’s release of the core personal consumption expenditures (PCE) price index – the Federal Reserve’s preferred measure of inflation – was a headline-grabbing week that lacked major market-moving data, leaving currencies mostly in a tight range.
However, the pound outperformed markedly in the Asian session, rising to an eight-month high of $0.6295 after a survey released on Thursday showed New Zealand business confidence jumped to a decade high in August. It was up 0.73% at $0.6291.
“Business confidence has risen sharply following the Fed’s shift in monetary policy,” said Michael Gordon, senior economist at Westpac Bank in New Zealand.
The Reserve Bank of New Zealand earlier this month cut interest rates for the first time in more than four years and has signaled more cuts are coming.
“We don’t think a single cut in the policy rate would make that much of a difference to the economic outlook,” Gordon said. “Instead, we think this shows how badly businesses deteriorated earlier in the year.”
In the broader market, the dollar struggled to find a floor, after rising 0.48% in the previous session, which analysts attributed in part to end-of-month demand.
The euro rose slightly towards a 13-month high and was last at $1.1135. Sterling rose 0.14% to $1.3209, not far from Tuesday’s peak of $1.3269, its strongest since March 2022.
The Australian dollar rose 0.27% to $0.6803, hovering around an eight-month high.
“PCE data is certainly the most important data this week in the US, but I doubt it will have a material impact on market expectations for FOMC policy unless there is a major miss,” said Carol Kong, currency strategist at Commonwealth Bank of Australia.
Markets have fully priced in the possibility of a 25 basis point rate cut by the Federal Reserve next month, with a 34.5% chance of a large 50 basis point cut, according to the CME FedWatch tool.
Investor bets on an imminent U.S. interest rate cut were boosted after Federal Reserve Chairman Jerome Powell said in Jackson Hole last week that “the time has come” to cut rates, joining a chorus of Fed policymakers who have recently signaled the same.
The prospect of a US interest rate cut next month has sent shockwaves through the dollar, which for most of the past two years has been supported by the Fed’s aggressive tightening cycle and expectations of how high interest rates could go.
The dollar has since fallen about 2.9% on the month so far, putting it on track for its biggest monthly decline in nine months.
The pound fell 0.07% to 100.94, after falling to a 13-month low of 100.51 on Tuesday.
The yen was little changed at 144.67 yen per dollar, targeting a gain of 3.7% on the month.
In contrast to the U.S. Federal Reserve’s impending easing cycle, Bank of Japan policymakers have indicated that the central bank will continue to raise interest rates if inflation remains on track, providing some relief to the Japanese currency, which has been under tremendous pressure due to wide interest rate differentials.
“With the Fed now on track to cut rates and the Bank of Japan normalizing still-negative real interest rates, the US dollar is expected to decline to near its fair value of around 135,” strategists at Lombard Odier said in a note.
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