Dollar hits one-month high amid shifting rate-cut expectations and global economic factors

Forex news: The Dollar surged to a one-month high on Tuesday as investors recalibrated their expectations for a March rate cut from the Federal Reserve. Meanwhile, the Pound and Yen faced declines due to easing inflationary pressures.

As of 1150 GMT, the Dollar strengthened by 0.51 per cent against a basket of currencies, reaching 103.16, marking its highest point in about a month. This increase followed a 0.2 per cent gain during subdued trading on Monday due to a US public holiday.

The Euro, in contrast, experienced a 0.54 per cent decline, dropping to $1.0892, signaling its most substantial one-day percentage decrease in two weeks. European Central Bank officials' comments downplaying the possibility of early rate cuts contributed to the Euro's dip, creating uncertainty about global borrowing costs.

Joachim Nagel from the ECB stated on Monday that it was premature to discuss cuts, while Robert Holzmann emphasised not to rely on borrowing costs falling this year. This commentary added to concerns that the market's pricing for the Fed rate path might be too aggressive.

"The hawkish ECB commentaries last night have fuelled concerns that market pricing for the Fed rate path may also be aggressive," noted Charu Chanana, head of currency strategy at Saxo in Singapore.

US bond yields saw an uptick on Tuesday, rising by 6 basis points to 4.011 per cent for the 10-year bond, providing support for the Dollar.

Jane Foley, head of FX strategy at Rabobank, attributed the Euro's decline to a grim outlook for Germany's economy, which contracted by 0.3 per cent in the previous year. Budget cuts and growth concerns have compounded the challenges for the German economy.

Additionally, data from the ECB on Tuesday revealed a sharp decline in consumer expectations of Eurozone inflation three years ahead, falling from 2.5 per cent to 2.2 per cent in a November poll.

Meanwhile, the Sterling faced a 0.71 per cent decline against the Dollar, settling at $1.2637, prompted by a slowdown in British wage growth through November. The data reinforced expectations of a significant rate cut by the Bank of England this year.

The Dollar rose by 0.58 per cent against the Japanese Yen, reaching 146.65 Yen to the Dollar, marking a five-week high. The Yen weakened after Japan's wholesale price index remained flat in December, with a slowing rate of change for the 12th consecutive month.

In Australia, the Dollar fell by 0.87 per cent to $0.6603, a trend often observed when investors express concerns about market risk.

Investors awaited comments later in the day from the Fed's Christopher Waller, whose dovish stance in late November influenced a robust year-end market rally. The market currently prices in a 69 per cent chance of a 25 basis points cut in March from the Fed, showing a slight decline from previous estimates.

Global geopolitical factors, including escalating tensions in the Red Sea, added an element of uncertainty. The Houthi movement, aligned with Iran, declared its intention to target US ships, signaling a continuation of attacks following recent US and British strikes in Yemen.

As Donald Trump secured a significant win in Iowa's first 2023 presidential contest for the Republican party, investors contemplated the potential implications of a more isolationist America under a Trump presidency, potentially impacting the Euro at the margins.

(With Reuters inputs.)