The U.S. Dollar Steadies Near 11-Week High
Dollar Strength and Focus on Fed Policy
The U.S. dollar saw a slight increase on Tuesday, approaching its highest level in nearly three months. Meanwhile, the Australian dollar lost momentum after an initial rise. Robust U.S. economic data and remarks from Federal Reserve Chair Jerome Powell have dispelled speculations of early and steep interest rate cuts, lending support to the greenback.
Traders are currently pricing in only a 16% chance of a cut in March, compared to a 69% chance at the beginning of the year. The expectation for cuts this year has also reduced, from around 150 basis points to approximately 115 basis points.
Market Dynamics and Outlook
The U.S. dollar, as measured against six other currencies, rose 0.1% to 104.58, reaching its highest point since November 14. There is little incentive for investors and corporates to offload their dollar holdings, especially with the looming China Lunar New Year holiday next week, which may lead to market reluctance in carrying short dollar positions.
Despite debates about the timing of Fed cuts, some analysts still see a positive outlook for the greenback. The real debate lies in the extent of Fed cuts relative to the rest of the world over the next two years.
Global Currency Trends
The euro was down 0.1% at $1.0732. German industrial orders unexpectedly surged in December, while euro zone consumers have trimmed their expectations for inflation over the next 12 months.
The Reserve Bank of Australia (RBA) recently left rates unchanged, but cautioned about a possible further monetary tightening. This has helped provide modest support for the Australian dollar in the near term.
Global Economic Impact
Sentiment towards the Aussie has also been boosted indirectly by the rebound in the Chinese equity market. Chinese stocks recorded their biggest one-day gain since 2022, and the yuan rose on signals of authorities strengthening their resolve to support slumping markets.
Sterling last fetched $1.2565, up around 0.15% on the day, despite Monday’s seven-week low. The pound’s fall on Monday came despite some upbeat economic data showing that UK unemployment was likely much lower late last year than previously thought, which could push out British rate cuts too.
Japanese Market and Economic Insights
The Japanese yen was stronger on the day at 148.71 per dollar, but not far off a two-month low of 148.90. Japan’s real wages fell for a 21st straight month, though at a slower pace, while household spending dropped for a 10th consecutive month, showing inflation outpaced wage recovery and continued to weigh on consumer spending.
