Dollar Edges Lower in Pullback from Nearly 3-Month Peak
Dollar Retreats from Recent Highs
The dollar continued its downward trend on Wednesday, retreating from a nearly three-month high against the euro. This decline was attributed to a decrease in U.S. bond yields, adding pressure to the currency.
Technical Factors Contributing to Pullback
Analysts pointed to technical factors for the dollar’s pullback, following a two-day rally against the euro. This rally came after unexpectedly strong U.S. jobs data and more hawkish rhetoric from Federal Reserve Chair Jerome Powell, which dampened expectations for an early interest rate cut.
U.S. Treasury Yields Provide Respite
U.S. Treasury yields gained some respite on Wednesday after falling from this week’s highs on solid demand at a sale of new three-year notes, removing some support for the dollar.
Impact on Currency Values
The dollar was down to $1.0772 per euro, while the dollar index slipped to 104.04 against six major peers. Analysts attributed this to profit-taking in long U.S. dollar positions following a bounce back in Treasuries.
Market Reluctance and Future Predictions
Despite the ruling out of March rate cut hopes, the market is still showing some reluctance to go all in on the long U.S. dollar trade given the high conviction around rate cuts later in the year. Traders are currently pricing in a 21.5% chance of a rate cut in March, compared with a 68.1% chance at the start of the year.
Key Test for Fed Rate Bets
Analysts and traders highlighted next Tuesday’s U.S. inflation data as a key test for Fed rate bets.
Global Impact on Currencies
A sharper than expected fall in industrial production in the euro zone’s largest economy had no impact on the euro as “Germany’s industrial malaise is now a well-known story”, said Chris Turner, Global Head of Markets at ING.
Expectations for Federal Reserve Policy
Financial markets are in the process of recalibrating their expectations for Federal Reserve policy. Positive economic data, particularly on inflation, could potentially weaken the greenback further.
Britain’s Impact on Currency Values
Sterling rose against the dollar after higher house prices in Britain supported bets that the Bank of England (BoE) was not likely to cut interest rates any time soon.
