Written by Stefano Ribaudo
(Reuters) – The US dollar fell slightly from its highest level in seven weeks on Monday after a rally sparked by strong US jobs data released on Friday and escalating conflict in the Middle East.
The dollar’s gains came on the heels of a US jobs report that showed the biggest jump in six months in September, a falling unemployment rate and a strong rise in wages, all of which point to a resilient economy and are forcing markets to price in on the Federal Reserve’s interest rate cuts.
Analysts said many of the factors that weighed on the dollar over the summer have reversed, pointing to fading recession fears and price action indicating pricing limits, and a cautious reaction function has been reached by this data set.
“We cannot see a drive to rebuild structural USD short positions in the next two weeks,” said Francesco Pisole, FX strategist at ING.
“Markets appear to have given up on another 50 basis point cut, the inflation figures should not change that, and although the situation in the Middle East may not deteriorate further, the consensus seems to be that a meaningful calm is unlikely for now. He added.
The index rose against its major counterparts by 0.05% to 102.60. On Friday, it rose to a seven-week high of 102.69, recording a gain of more than 2% for the week, the largest in two years. It was just above 100 early last week.
MUFG noted that this is the second time the dollar index has retreated towards the support at the 100.00 level in recent years. Last time in July 2023, the US currency index tested but failed to break the 100.00 level before recording a strong recovery (+7.8%) in the following three months.
“The extent of China’s fiscal stimulus, which would mostly help economies outside the US, will be one of the main factors affecting the dollar in the short term, along with macro data, which could influence the course of the Reserve Bank’s policy,” Lefteris Pharmakis said. Federalist. Forex Strategist at Barclays.
China is about to announce the details of its financial plan to boost the economy.
In the Middle East, Israel bombed Hezbollah targets in Lebanon and the Gaza Strip on Sunday, ahead of the one-year anniversary of the October 7 attacks that sparked its war. The Israeli Defense Minister also announced that all options are open to retaliate against arch-enemy Iran.
The euro reached $1.0970, down 0.06%.
“Effective fiscal measures in Italy and France will benefit the euro at the margin because they strengthen sovereign creditworthiness and thus the credibility of the eurozone project,” Barclays’ Farmakis said.
The two countries, which the European Union has placed under so-called excessive deficit measures, are taking measures to reduce their budget deficits.
The yen fell slightly to 149.10 to the dollar, its weakest level since August 16, before trimming its losses to trade around 148.60. This came on top of a decline of more than 4% last week, the largest weekly percentage decline since early 2009.
The yen’s weak performance is also due to comments made last week by new Prime Minister Shigeru Ishiba, which fueled expectations that a rate hike in Japan is still a long way off.
The index reached its highest level in two months at 4.016% in London trading.
However, Barclays believes it has room to rise by about 20 basis points even after accounting for a worst-case bearish economic scenario, arguing that the latest jobs data has strengthened its belief in a long and gradual Fed easing cycle.
Bank of America now expects the Fed to cut by 25 basis points per meeting through March 2025, then 25 basis points per quarter through the end of 2025.
Markets expect the Fed to cut interest rates by just 25 basis points in November, instead of 50 basis points, after the jobs data. They are now pricing in a 95% chance of a quarter-point cut, up from 47% a week ago, and a 5% chance of no cut at all, according to CME’s FedWatch tool.
The British pound fell 0.4% against the dollar.
It posted its biggest daily decline last week since April after Bank of England Governor Andrew Bailey’s comments led to a significant unwinding of long positions on sterling, making the British currency more vulnerable to changes in sentiment.