Dollar strengthens as traders reevaluate expectations for Fed rate cuts

Dollar rebounds: The dollar saw an uptick on Thursday as investors reconsidered their projections for the extent of Federal Reserve rate cuts this year, introducing a sense of caution after a robust risk rally last month. 

Trading resumed in Asia following an extended New Year break in Japan.

The dollar, particularly against the yen, neared a two-week peak at 143.09 yen, registering a gain of over 0.9 per cent against the Japanese currency in the previous session, marking its best day since October.

Meanwhile, the Australian dollar, often indicative of risk appetite, remained close to its two-week low of $0.6703. 

The New Zealand dollar, also sensitive to risk, hovered near its weakest level in two weeks at $0.6249.

Minutes from the Federal Reserve's December policy meeting, released on Wednesday, indicated officials' confidence in curbing inflation, with concerns about the potential economic impact of an "overly restrictive" monetary policy.

However, there was no clear indication of when the Fed might commence rate easing, with policymakers recognizing the need for rates to remain restrictive for some time.

Market sentiment shifted as concerns about global growth, risk-off sentiment in US equities, and a partial unwinding of aggressive bets on Fed cuts contributed to the US dollar's rebound. 

Against a basket of currencies, the greenback rose 0.06 per cent to 102.46, nearing the three-week peak of 102.73 from the previous session.

The euro eased 0.02 per cent to $1.0921, while sterling edged 0.05 per cent higher to $1.2669 but remained close to its recent three-week low.

Separate data released on Wednesday showed a continued contraction in US manufacturing in December, albeit at a slowing pace, and a third consecutive monthly decline in job openings in November, signalling easing labour market conditions.

Despite recent data indicating a cooling US economy, expectations of Fed rate cuts have led to divided opinions among traders on the timing and scale of easing. 

Market pricing now suggests a roughly 72 per cent chance of the Fed initiating rate cuts in March, compared to a 90 per cent chance a week ago, according to the CME FedWatch tool.

The upcoming US nonfarm payrolls report on Friday is expected to provide further clarity on the Fed's room for rate adjustments.

In geopolitics, Hezbollah in Lebanon and the Israeli army expressed intentions to avoid escalating tensions beyond the Gaza Strip following a drone strike that killed a Palestinian Hamas deputy leader in Beirut.

(With Reuters Inputs)