Updated February 5th, 2024 at 07:52 IST

Dollar hits 8-week high as Fed rate cut expectations diminish

Traders are now pricing in only a 20 per cent chance of a rate cut in March, down from nearly 50 per cent just a week ago.

Reported by: Business Desk
Dollar | Image:Pixabay
Advertisement

Dollar surges: The dollar surged to its highest level in eight weeks against major currencies on Monday as traders reassessed expectations for aggressive rate cuts by the Federal Reserve, buoyed by signs of resilience in the US economy.

Meanwhile, the yen, Australian dollar, and New Zealand dollar all plummeted to two-month lows, while the euro also dipped to its lowest level in over a month against the stronger greenback, which pushed the dollar index to its peak at 104.18, the highest since December.

Advertisement

The recalibration of Fed expectations followed Friday's robust US jobs report, which surpassed market forecasts and reinforced Chair Jerome Powell's indication after the central bank's policy meeting last week that a rate cut in March was unlikely.

According to Chris Weston, head of research at Pepperstone, Powell's commentary coupled with the strong jobs data effectively ruled out a March rate cut, prompting a shift in market sentiment. 

Advertisement

Traders are now pricing in only a 20 per cent chance of a rate cut in March, down from nearly 50 per cent just a week ago.

Powell, in an interview on the CBS news show "60 Minutes," stressed upon the Fed's cautious approach in deciding when to adjust interest rates, indicating that the current strong economy allows room for confidence-building measures against inflation.

Advertisement

Market indicators reflect a significant decrease in the expected amount of Fed rate cuts for the year, with Fed funds futures now showing roughly 137 basis points priced in for easing, down from 150 bps at the end of the previous year.

Meanwhile, Treasury yields surged on expectations of sustained higher US rates, with the two-year yield reflecting near-term interest rate expectations, rising nearly seven bps to 4.4386 per cent, while the benchmark 10-year yield climbed five bps to 4.0829 per cent.

Advertisement

In China, the securities regulator pledged to prevent abnormal market fluctuations after Chinese stocks hit five-year lows, but no specific measures were announced. This development had little impact on the yuan, which remained marginally lower against the dollar, pressured by the dollar's strength.

Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA), expressed scepticism about the yuan's near-term prospects, noting that concrete details about potential easing measures from the Chinese government were lacking.

Advertisement

Overall, the dollar is expected to maintain its recent gains amidst evolving market dynamics and recalibrated expectations regarding US monetary policy.

(With Reuters Inputs)

Advertisement

Published February 5th, 2024 at 07:52 IST