Dollar holds steady amidst uncertainty over Fed rate cuts

Dollar steady, yen falls: The dollar maintained its stability on Monday following recent data indicating persistent inflation in the United States, casting doubts on the Federal Reserve's timeline for initiating rate cuts. Meanwhile, the yen remained near the psychologically significant level of 150 per dollar. With US markets closed for President's Day, trading volumes are expected to remain subdued throughout the day.

In recent days, the yen has hovered around the 150 level, prompting officials to monitor currency movements closely amid speculation of potential intervention by Japanese authorities to stabilise the yen. Despite strengthening 0.20 per cent to 149.94 per dollar on the day, the yen has declined approximately 6 per cent year-to-date. Against the euro, the yen has remained near three-month lows of 161.925.

Marc Chandler, chief market strategist at Bannockburn Global Forex, noted that Ministry of Finance officials have taken steps to intervene against rapid currency movements, signalling a possible escalation in intervention measures. Charu Chanana, head of currency strategy at Saxo, suggested a likely range of 148–151 for the dollar/yen pair in the upcoming week.

Japan's low yields 

Due to the interest rate difference between Japan and the US, short-selling and financing trades have been supported by Japan's low rates, which has rendered the yen vulnerable. Speculators hold a net short-yen position worth $9.2 billion, according to the latest weekly data from the market regulator.

The dollar index, which measures the greenback against major currencies, began the week largely unchanged at 104.20, following five consecutive weeks of gains. Traders have adjusted their rate-cut expectations amid higher-than-expected inflation in January, leading to speculation of a delayed start to the Fed's rate cuts.

Easing cycle 

Market sentiment suggests a shift towards expecting the easing cycle to commence in June rather than March. However, concerns persist over economic softening, with declining retail sales and rising jobless claims indicating a challenging economic landscape. Investors await the release of the Fed meeting minutes and speeches by Fed officials scheduled for this week for further insights into monetary policy direction.

Christopher Wong, currency strategist at OCBC, anticipates a consolidation phase for the dollar in the absence of significant catalysts. Meanwhile, the euro and sterling traded at $1.0782 and $1.26205, respectively, with the pound receiving a boost from robust UK retail sales data. The Australian and New Zealand dollars also saw modest gains as Chinese markets reopened after a holiday.

(with Reuters inputs)