Dollar Surges as Rate Cut Hopes Disappear, Eyes Three-Month Peak

6 Feb 2024 , 10:03 AM

Due to rising anticipation that the Federal Reserve won’t be cutting interest rates significantly this year, the U.S. dollar was trading close to a three-month high on Tuesday.

The dollar index, which compares the value of the US dollar to six competitors, was at 104.42 on Monday after reaching a high of 104.60 on November 14. After declining 2% in 2023, the index has now increased by 3% for the year.

Following a stunning jobs report last week, data released on Monday revealed that the U.S. services sector expanded in January as new orders rose and employment surged. This indicates a good start to the year for the economy.

Any residual expectations of an early and sharp reduction in interest rates by the Fed have been dashed by a run of strong U.S. economic data, and Fed Chair Jerome Powell and other officials have also refuted the idea.

According to the CME FedWatch tool, traders have been reducing their bets on rate reduction since the beginning of the year. As of right now, they are pricing in just a 15% likelihood of a drop in March, down from a 69% chance at the beginning of the year.

Additionally, they are now pricing in 115 basis points (bps) of reduction this year as opposed to the roughly 150 bps of easing that was predicted in the first part of January.

Investor attention in Asia will be focused on the Reserve Bank of Australia’s policy announcement later in the day. It is largely anticipated that the central bank will maintain current interest rates, putting Governor Michele Bullock’s remarks front and centre.

With economists surveyed by Reuters forecasting the central bank to maintain rate stability well into the second half of this year, investors have shifted their bets to push out the first rate decrease from the RBA to August, rather than June.

Prior to the verdict, the Australian dollar barely moved, hovering around its lowest level since 17 Nov.

The euro was up 0.02% at $1.0743 in other currencies, while the sterling last traded at $1.254, up 0.06% for the day but still near the seven-week low it reached on Monday.

On Monday, the pound declined in spite of some positive economic statistics. Data indicated that the unemployment rate in the latter part of last year was probably substantially lower than previously believed, which may also lead to rate reductions there.

The Japanese yen gained 0.07% to trade at 148.56 against the dollar, staying close to the two-month low of 148.90 that it reached on Monday.

Japan’s real wages declined for the twenty-first consecutive month, but more slowly than in the previous ten. This indicates that inflation outpaced pay recovery and continued to have a negative impact on consumer spending.

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