US dollar trades in tight range amid Fed rate-cut speculation

US dollar remains tight: The US dollar maintained a narrow range on Thursday as market participants assessed the potential timing of Federal Reserve interest rate cuts following comments from Fed officials regarding Tuesday's inflation data. Despite renewed pressure this week, the yen held above its three-month low against the greenback, reached on Tuesday, as Japan's economy slipped into recession as it unexpectedly shrank for two consecutive quarters due to weak domestic demand.

The inflation data has shifted expectations of a first Fed rate cut to mid-year after the consumer price index rose 3.1 per cent in January year-on-year, higher than the expected 2.9 per cent increase. The market now predicts no rate cut in March, compared to a 77 per cent expectation of rate cuts starting a month ago, according to CME's FedWatch tool. There is approximately a 60 per cent chance the Fed will also maintain rates at its May meeting. Chicago Fed President Austan Goolsbee stated on Wednesday that even if price increases exceed expectations in the coming months, the Fed's path will remain on track, cautioning against delaying interest rate cuts.

Economy may face challenges 

Fed Vice Chair for Supervision Michael Barr expressed confidence but noted that the January CPI figures indicate the economy may face challenges in returning to 2 per cent inflation. Matt Simpson, senior market analyst at City Index, remarked that the Fed's approach allows for setbacks, as evident in comments from Fed officials following the high inflation report.

The dollar index, which measures the dollar against six major currencies, stayed below a recent three-month high of 104.97, reaching 104.66. The yen strengthened 0.31 per cent against the dollar to 150.15, despite Japan's weak GDP figures. Commonwealth Bank of Australia Currency Strategist Carol Kong suggested the technical recession in Japan would have minimal impact on the dollar/yen pair, highlighting the importance of the upcoming spring wage negotiations.

The Australian dollar briefly declined after disappointing job data but later stabilised at $0.64895. The kiwi traded at $0.6084, while sterling was at $1.25675, ahead of Britain's GDP data. The euro remained flat at $1.0729. In the cryptocurrency market, bitcoin rose 0.45 per cent to $52,008.20, reaching a high of $52,544.76, surpassing $1 trillion in total value invested in bitcoin for the first time since November 2021.

(with Reuters inputs)