Written by Ankur Banerjee and Medha Singh
SINGAPORE/LONDON (Reuters) – The dollar fell from a nearly seven-week high against major currencies on Tuesday after investors weighed expectations of a U.S. interest rate cut, even as geopolitical tensions in the Middle East continued to support the currency’s safe-haven appeal.
The euro rose 0.2 percent to $1.099225, which is not far from the seven-week low of $1.09515 recorded last week. The pound sterling recorded $1.31 after hitting a three-week low of $1.30595 on Monday.
Traders have radically shifted their expectations for monetary easing from the Federal Reserve this year. Last week’s strong jobs report gave credence to Federal Reserve Chairman Jerome Powell, who said the central bank would stick with its usual quarter-point cuts after starting its easing cycle with a large-scale cut in September.
“A lot of the adjustments to the dollar are coming on the back of the idea that the Fed is not going to cut by 50 basis points anytime soon,” said Nick Rees, senior foreign exchange market analyst at Monex Europe.
“We are no longer concerned about the United States sliding into recession this year.”
New York Fed President John Williams, a regular vote on the Fed’s rate-setting committee, echoed Powell’s comments, telling the Financial Times in an interview that he did not see the September move “as a rule for how we act going forward.”
The CME FedWatch tool showed that markets are no longer fully pricing in a November rate cut and attribute a roughly 90% chance of a 25 basis point cut. Just 50 basis points of easing is scheduled to be priced in by December, down from more than 70 basis points the previous week.
This kept the dollar ahead and helped the currency rise to multi-week highs against the euro, pound and yen. However, the yen pared some of its losses on Tuesday, as rising geopolitical concerns prompted investors to flee towards safe-haven assets.
The US currency index, which measures the US currency against major rival currencies, fell 0.2% to 102.31.
“We could see the dollar rise again on the CPI later this week, and we could see some of the comments from the Fed further adjusting to become a bit more hawkish,” Monex Europe’s Rees added.
Investors’ focus this week will be on the US inflation report, due on Thursday, and the minutes of the Federal Reserve’s September meeting due on Wednesday.
Ipek Ozkardskaya, senior analyst at Swissquote Bank, said: “If Thursday’s CPI update is weak enough, it could ultimately help calm the nerves of the Fed’s dovish sentiment and prevent the US dollar from entering the bullish consolidation zone in the medium term against many… of major currencies.
“If not, November no-cut pricing could take off, meaning higher yields, a stronger US dollar across the board, weakness in other currencies, and some negative pressure on equity valuations.”
The index remained above 4%, after touching that level on Monday for the first time in two months as traders reduced their bets on deep cuts in interest rates. (we/)
Meanwhile, Chinese stock markets returned with a strong open after a week-long holiday break, but capped some gains as optimism over stimulus measures fluctuated slightly due to a lack of details.
The yuan fell slightly due to the strength of the dollar, falling to 7.0521 per dollar.
The yen rose 0.4% to 147.668 yen to the dollar, after falling to a seven-week low of 149.10 on Monday, as comments by new Japanese Prime Minister Shigeru Ishiba cast doubt on the Bank of Japan’s boldness in raising interest rates in the near term.
Ishiba surprised markets last week when he said the economy was not ready for further interest rate hikes, a clear shift from his previous support for the Bank of Japan to undo decades of aggressive monetary stimulus.
In other currencies, the Australian dollar fell to its lowest level since September 16 at US$0.6715, after the minutes of the country’s central bank’s latest meeting looked somewhat pessimistic. It decreased in recent trading by 0.5% to $0.67280.
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