The dollar remained firm and close to recent highs on Tuesday, on the eve of an expected cut in U.S. interest rates as traders revise upward long-term rate assumptions.
The euro, which is heading for a decline of almost 5% for the calendar year against the dollar, was not far from its lowest level of the year, at $1.0518.
The gap between US and German ten-year yields is 216 basis points and has widened by almost 70 basis points in three months.
The yen was lower for the seventh straight session – and slightly weaker at 154.17 per dollar in morning trading – as markets reduced the chances of a Japanese rate hike this week and view a move in January is more likely.
The Federal Reserve announces its interest rate decision Wednesday and interest rate futures imply a 94% chance of a hike, even though service sector activity is at an all-time high for three years according to an S&P Global survey of purchasing managers.
The Atlanta Fed’s GDPNow gauge stands at 3.3% for the fourth quarter and the strong economy has pushed yields higher and supported the dollar, with traders saying the expected cut this week could be the last for a while.
After a cut on Wednesday, markets see a 37% chance that there will be a 25 basis point cut or no cut through 2025, according to the CME’s FedWatch tool, up from about 21% a year ago. week earlier.
“I think the Fed will now be concerned about a resurgence of inflation, as an unknown policy mix and sticky prices create ample opportunity for inflation to return in 2025,” said Brent Donnelly, chairman. from Spectra Markets.
“Therefore, I think she will signal a very cautious approach going forward and rely on language that suggests concerns about inflation and a higher neutral rate.”
Besides the Fed, the Bank of Japan, the Bank of England and Norges Bank are meeting this week and are expected to make no changes on Thursday, while the Riksbank is expected to cut rates, perhaps by 50 basis points.
Sterling rebounded on Monday as a survey of business activity pointed to rising prices in Britain, while jobs data is due on Tuesday, with upward pressure on wages, which which reinforces the arguments in favor of prudence on the part of the central bank. The British pound was last bought at $1.2695.
The Canadian dollar, squeezed by falling interest rates and the risk of U.S. tariffs, fell to its lowest level in 4 1/2 years on Monday as the sudden resignation of Finance Minister Chrystia Freeland increased pressure on an unpopular government.
The Australian and New Zealand dollars are stuck near year-long lows, although they were spared the latest weak Chinese economic indicators on Monday, with markets betting government spending will come to the rescue. [AUD/]
The Aussie remained stable at $0.6373 and the Kiwi rose to $0.5792. New Zealand has increased its bond issuance forecasts for the coming years and long-term yields have increased.
China’s yuan came under slight pressure at 7.2918 in offshore trading, as gloomy expectations for Chinese economic growth pushed 10-year bond yields to record highs.
