Dollar in defensive mood after jobs data; Fed in focus

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SINGAPORE – The dollar fell on Wednesday, weighed down by bearish US labor market data, as investors worried about the US debt ceiling and banking sector risks, while they await a federal policy decision later in the day.

Data on Tuesday showed that job openings in the United States fell for the third month in a row in March, and layoffs increased to the highest level in more than two years, giving some hope that a downturn in the labor market may help the Fed’s fight against inflation.

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The dollar index, which measures the greenback against six rivals, fell 0.029% to 101.820 after falling 0.245% on Tuesday.

The US central bank is widely expected to raise interest rates by 25 basis points when it wraps up its two-day meeting on Wednesday and investors will focus on whether the Fed hints at a pause or further tightening.

“Currency reaction will come from whether the post-meeting and press conference statement is ‘hawkish’ or ‘pessimistic,’” said Joseph Capurso, head of international and sustainable economics at the Commonwealth Bank of Australia.

“We expect FOMC Chairman Powell to be hawkish compared to market expectations because inflation is very high and the labor market is very tight, although both indicators have moved in the right direction recently.”

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The CME FedWatch tool showed that markets had predicted an 86% chance of a 25 basis point rate hike on Wednesday, but expect the central bank to cut rates at the end of the year.

The Fed meeting comes as US financial markets reel from the weekend failure of San Francisco-based First Republic Bank as well as fears that the government may run out of cash after June 1 without raising the debt ceiling.

The yield on the 10-year Treasury fell 13.3 basis points to 3.440% on Tuesday, while the yield on the 30-year Treasury fell 8.5 basis points. With Japan closed for the holiday, Treasuries were not traded early Wednesday.

Meanwhile, the euro rose 0.12% to $1.1012 after rising 0.2% overnight before the European Central Bank’s regular policy meeting on Thursday.

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Data on Tuesday showed inflation accelerated in the eurozone last month, but core price growth unexpectedly eased, adding to arguments for a rate hike from the European Central Bank.

Based on pricing in the derivatives markets, traders believe there is roughly an 85% chance of a 25bps ECB hike on Thursday, and a 15% chance of 50bps.

Ryota Abe, an economist on global markets and treasury management at Sumitomo Mitsui Banking Corporation, said that markets have moved up interest rates in the euro area more than in the United States.

“If the difference in prices between the two regions becomes more pronounced, the DXY (dollar index) could drop below the 100 mark.”

Elsewhere, the Australian dollar rose 0.06% to $0.667, a day after the Reserve Bank of Australia surprised markets with a rate hike to 3.85% and said more tightening may be needed to tame inflation.

The kiwi rose 0.35% against the dollar, to $0.623.

While the pound sterling was last traded at $1.2479, up 0.12% during the day.

The Japanese yen rose 0.11% to 136.40 per dollar, recouping some of its losses last week when the Bank of Japan stuck to its ultra-loose monetary policy.

(Reporting by Ankur Banerjee in Singapore; Editing by Jacqueline Wong)