Dollar weakens as speculators assume the Fed has finished raising rates

3 Nov 2023 , 10:11 AM

As traders bet that the U.S. Federal Reserve was probably done raising interest rates, the dollar continued to weaken against a basket of currencies on Friday and appeared headed for a weeklong fall. This increased risk aversion.

The dollar index, which compares the value of the US dollar to six competitors, was at 106.22 on Thursday, not too far off its one-week low of 105.80. The index is expected to decline by 0.3% this week, marking just its third losing week since July.

In the wake of the U.S. central bank maintaining interest rates unchanged on Wednesday, markets are now pricing in a less than 20% likelihood of a rate increase in December, compared with 39% a month earlier, according to a CME FedWatch tool. In a sign of the economy’s resiliency, the Fed did, however, leave the door open to a further rise in borrowing costs.

According to data released on Thursday, there was a little increase in the number of new claims for unemployment benefits made by Americans last week, despite the labour market continuing to show few signs of a severe downturn.

Investor attention will now be focused on the October non-farm payrolls data, which is expected to show 180,000 jobs. A lower number would probably result in more pressure on the dollar.

Given the strength of the American economy relative to the rest of the globe, analysts predicted that any decline in the dollar would likely only last temporarily.

After ten consecutive rate rises by the European Central Bank last week, the focus shifted to how long the rates would remain high.

The ‘last mile’ of deflation may be the most difficult, therefore the bank cannot yet fully rule out more rate hikes, according to ECB board member Isabel Schnabel, who stated on Thursday that the central bank is on pace to drive inflation back down to 2% by 2025.

After rising 0.49% on Thursday, the euro was down 0.03% at $1.0617. The weekly increase for the single currency is scheduled to be 0.5%.

With the Japanese yen trading at 150.41 against the US dollar, traders were on edge and watching for any indications of Japanese government intervention.

The Bank of Japan’s adjustment to its yield curve management policy on Tuesday caused the yen to drop to a one-year low versus the dollar and a fifteen-year low against the euro, capping an eventful week for the currency.

According to Reuters on Thursday, the governor of the central bank, Kazuo Ueda, will keep rolling back the ultra-loose monetary policy and aim to leave the accommodative regime that has been in place for ten years next year.

Ueda’s plans are based on conversations with six people who have firsthand knowledge of the BOJ’s viewpoints, including government representatives who work closely with the bank.

After rising 0.4%, sterling was down 0.10% on the day and headed for a 0.5% weekly gain, trading at $1.2189. Along with other major central banks, the Bank of England held interest rates stable and made it clear that it had no intention of lowering them anytime soon.

The New Zealand dollar dropped 0.24% to $0.588, while the Australian dollar slid 0.19% to $0.642.

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