SINGAPORE/LONDON—The dollar rose on Friday, heading for its steepest weekly rise since May as traders scaled back expectations of early U.S. interest rate cuts this year.
The U.S. currency’s strong start has cast a shadow on the euro despite rising inflation in the eurozone easing market pressure on the European Central Bank (ECB) to lower interest rates.
The dollar’s rebound will be tested by the non-farm payrolls report due later in the day. Economists polled by Reuters forecast that 170,000 jobs were created in December, fewer than the 199,000 in November.
Federal Reserve officials in December predicted 75 bps of rate cuts in 2024. Money markets expected around double that amount, with the optimism spurring a year-end blistering rally in stocks and bonds.
But since the start of the year, markets have dialled back their expectations. Traders are now pricing in less than 140 basis points of cuts this year, with the chance of a cut in March at 62 percent, down from 86 percent a week earlier, CME FedWatch tool showed.
Moh Siong Sim, currency strategist at Bank of Singapore said the data this week has shown that the U.S. labour market seems to be holding up and “perhaps the Fed will still need to stress the message of keeping the rates a bit longer than what the market has already priced in.”
“But we'll see, because tonight’s payroll data will be key data to watch.”
Supporting the dollar, data showed on Thursday that U.S. private employers hired more workers than expected in December, pointing to persistent strength in the labour market that should continue to sustain the economy.
Eurozone Inflation
The euro fell 0.36 percent to $1.0904, and is on track for a 1.2 percent decline in the week, its sharpest weekly drop since mid-May and snapping a run of three weeks of increases.Inflation across the 20-nation bloc jumped to 2.9 percent in December from 2.4 percent in November, just shy of expectations for a 3.0 percent reading.
The data is line with the ECB’s prediction that inflation bottomed out in November and will now flatline in the 2.5 percent to 3 percent range through 2024, well above the bank’s 2 percent target, before slowing again in 2025.
Investors and policymakers disagree on the number of rate cuts this year. Traders are betting that the ECB will cut rates six times this year with the first move coming in March or April. Policymakers argue that it might take until mid-2024 to gain the confidence that inflation is under control.
Elsewhere, the yen, which is highly sensitive to U.S. bond yields, weakened 0.47 percent to 145.29 per dollar, after touching a more than three-week low earlier in the session.
The 10-year U.S. Treasury yield broke through the psychological 4 percent mark and was last at 4.03 percent.
Investors have tempered their expectations of the Bank of Japan exiting its ultra-loose monetary policy in the near term, with concerns over the earthquake that hit western Japan earlier this week casting further doubts on a policy shift.
