Written by Kevin Buckland and Brigid Riley
TOKYO (Reuters) – The U.S. dollar rose against its major counterparts on Tuesday after Federal Reserve Chairman Jerome Powell backed off bets on further deep interest rate cuts.
The yen stabilized near the middle of its range against the dollar over the past month, after two days of volatility as traders weighed the size of Japan’s next prime minister and his cabinet.
The Australian dollar rose towards its highest level on Monday after upbeat local retail sales data.
Powell adopted a more hawkish tone in a speech at a conference in Tennessee, saying the US central bank was likely to commit to interest rate cuts of a quarter of a percentage point in the future.
“This is not a committee that feels it is in a rush to cut interest rates quickly,” he said.
Traders remain confident that the Fed will cut rates again at its next policy-setting meeting in November, but they cut expectations for a 50 basis point cut to 35.4% from 53.3% a day earlier, according to FedWatch from CME Group (NASDAQ) 🙂 Tool.
“The door is not closed on a 50 basis point cut, because if economic data declines, such a cut would be justified,” said Matt Simpson, chief market strategist at City Index. “But Powell clearly believes markets are overly excited” about the upcoming cuts.
The Fed kicked off its easing cycle with a larger-than-expected half-point cut last month.
Powell’s speech came ahead of a heavy week of US data, including the Institute for Supply Management’s manufacturing index released later on Tuesday and a non-manufacturing report on Thursday, followed by potentially crucial monthly jobs numbers on Friday.
If ISM non-manufacturing data and jobs report come in above expectations again this month, the dollar could see a “good bounce” higher before eventually resuming its downward path, Simpson said.
The index added 0.1% to 100.82 by 0403 GMT, after rising 0.3% on Monday.
The US currency rose 0.45 percent to 144.27 yen
Shigeru Ishiba, scheduled to be appointed as Japan’s new prime minister later on Tuesday, is viewed by markets as a monetary policy hawk, despite a recent softening of rhetoric on the need for policy normalization.
He won his party’s leadership election on Friday in one of the closest races ever, and is now trying to unify the party after calling a snap general election for October 27.
Minutes from the Bank of Japan’s September meeting showed on Tuesday that policymakers discussed the need for caution about raising interest rates in the near term, with little impact on the market.
“With Kishida out and Ishiba in, it looks like the policy will continue,” said Andy Ji, chief Asian FX strategist at InTouch Capital Markets.
“In the short term, (this) means that the BOJ’s dovish approach has the government’s blessing and the current trading strategy is to buy the dips.”
The euro traded near a one-week low hit on Monday after German inflation fell to its lowest level since early 2021, fueling speculation about another interest rate cut this month.
There was little change in the euro at $1.113575, after falling to $1.1113 in the previous session.
ECB President Christine Lagarde told Parliament that “recent developments reinforce our confidence that inflation will return to target in due course,” and this should be reflected in the policy decision of October 17.
The index rose 0.09 percent to US$0.69185, approaching the one-and-a-half-year peak of US$0.6943 hit on Monday after Australian retail sales rebounded more than expected in August.
It traded at $0.6322, down 0.47%.
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