The dollar stabilizes as traders await the U.S. core PCE inflation data, with market bets on a Fed rate cut solidifying, causing the greenback to retreat from recent highs.
Bollywood Fever: The U.S. dollar held steady on Thursday, recovering slightly from the steep losses it incurred earlier in the week.
Traders are now looking ahead to the upcoming release of the core personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation measure, which is expected to provide further clues on the outlook for U.S. interest rates.
Friday’s core PCE data is the highlight of an otherwise quiet week for market-moving economic indicators, leaving major currencies largely rangebound.
The dollar index, which measures the greenback against a basket of major currencies, was last at 100.94, recovering from its recent dip to a 13-month low of 100.51.
In early Asian trading on Thursday, the dollar maintained its overnight gains after rising 0.48% against a basket of major peers in the previous session. Analysts attributed this rise partially to month-end demand.
The euro, which had reached a 13-month high earlier in the week, eased to $1.1130. Meanwhile, the British pound rose 0.08% to $1.3201, though it remained below Tuesday’s peak of $1.3269, its strongest level since March 2022.
The Australian dollar also pulled back from an eight-month high, last trading at $0.6793.
Carol Kong, a currency strategist at the Commonwealth Bank of Australia, noted that while the core PCE data is crucial, it is unlikely to drastically alter market expectations for Federal Open Market Committee (FOMC) policy unless there is a significant deviation from forecasts.
Market participants have already priced in a 25-basis-point rate cut from the Federal Reserve next month, with a 34.5% chance of a more substantial 50-basis-point reduction, according to the CME FedWatch tool.
These expectations have been reinforced by recent remarks from Fed Chair Jerome Powell at the Jackson Hole symposium, where he indicated that the “time has come” to cut rates. This sentiment has been echoed by other Fed policymakers in recent weeks.
The anticipation of lower U.S. rates has pressured the dollar, which had previously been bolstered by the Fed’s aggressive rate hikes over the past two years. So far this month, the dollar has fallen by approximately 2.9%, putting it on track for its steepest monthly decline in nine months.
In other currency movements, the New Zealand dollar edged up 0.2% to $0.6258, while the Japanese yen remained steady at 144.57 per dollar.
The yen is poised for a 3.7% monthly gain, buoyed by signals from the Bank of Japan (BOJ) that it may continue raising interest rates if inflation remains on track.
This contrasts with the Fed’s anticipated easing, which has provided some support for the yen, a currency that had been under pressure due to significant interest rate differentials.
Strategists at Lombard Odier suggested that with the Fed nearing a rate-cutting cycle and the BOJ potentially normalizing its still-negative real policy rates, the USD/JPY could decline closer to its fair value of around 135.
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