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Updated January 16th, 2024 at 20:12 IST

Dollar advances as traders weigh rate-cut bets, Red Sea tensions

Market expectations for a substantial 145 basis point cut to the ECB's deposit rate this year.

Business Desk
Dollar hits three-month low
Dollar hits three-month low | Image:Unsplash
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Dollar advances: The US dollar experienced an ascent as investors adjusted their expectations for near-term rate cuts by the Federal Reserve, responding to hawkish remarks from European Central Bank officials on Tuesday. Concurrently, concerns about potential attacks on ships in the Red Sea weighed on risk sentiment.

The dollar strengthened by approximately 0.3 per cent against a basket of currencies, reaching 102.94. This gain followed a 0.2 per cent overnight increase during subdued trading on Monday, which marked a public holiday.

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The euro witnessed a 0.3 per cent decline to $1.0912, indicating its most significant one-day percentage drop in two weeks. Sterling also dipped 0.38 per cent to $1.2679, moving away from the near-five-month high of $1.2825 achieved in late December.

Reservations for early rate cuts

European Central Bank officials expressing reservations about early rate cuts cast a shadow on the global rate outlook. ECB's Joachim Nagel emphasised, "It's too early to talk about cuts; inflation is too high," cautioning against the mistake of lowering interest rates prematurely.

Market expectations for a substantial 145 basis point cut to the ECB's deposit rate this year, likely commencing in April, were fueled by these hawkish ECB commentaries. Charu Chanana, Head of Currency Strategy at Saxo in Singapore, remarked on concerns that the Fed's rate path might also face aggressive market pricing in light of the ECB's stance.

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Amidst these financial dynamics, heightened concerns about disruptions in the Red Sea due to escalating tensions were noted. An official from Yemen's Houthi movement declared intentions to expand targets in the Red Sea region, including US ships, following US and British strikes on their Yemen sites.

The risk proxies

The Australian and New Zealand dollars, often seen as risk proxies, depreciated by over 0.5 per cent to their lowest levels in a month. The Aussie stood at $0.6614, and the Kiwi at $0.61665.

Investors are awaiting comments from the Federal Reserve's Christopher Waller, whose dovish turn late last year influenced market sentiment positively. Current market expectations for a 25 bps cut in March from the Fed have decreased to 66 per cent, down from 77 per cent the previous day. Traders are projecting a total of around 160 bps in cuts this year, up from 140 bps just a week earlier.

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Analysts, including Hamish Pepper from Harbour Asset Management, cautioned against overly aggressive expectations, asserting that the market might be pricing in too many rate cuts from the Fed in 2024. The yield on 10-year Treasury notes rose to 4.003 per cent, and the two-year US Treasury yield, linked to interest rate expectations, increased to 4.211 per cent.

Yen weakened

As the week unfolds, key data releases include reports on Chinese fourth-quarter growth and retail sales, with sterling traders focusing on jobs and inflation data. Markets are currently pricing in around 120 bps of rate cuts by the Bank of England in 2024, with the first one anticipated in May.

Simultaneously, the yen weakened by 0.29 per cent to 146.15 per dollar after data indicated that Japan's wholesale price index remained unchanged in December from a year ago. This data suggests a moderation in consumer inflation in the coming months, potentially relieving pressure on the Bank of Japan to phase out its massive stimulus soon. Expectations of a policy shift from the BOJ had bolstered the yen towards the end of 2023, but the currency has since retraced, down 3 per cent in January after a 5 per cent gain against the dollar in December.

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(with Reuters inputs)

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Published January 16th, 2024 at 20:12 IST

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