TOKYO: The dollar hovered near a six-week high against major peers on Wednesday as investors cemented expectations that the Federal Reserve would be in no rush to cut interest rates in the face of a resilient US economy.
The Japanese yen, though, ticked higher as expectations rose for a stimulus exit as soon as March, following hawkish comments from the Bank of Japan on Tuesday.
The US dollar index - which tracks the currency against six rivals, including the euro and yen - was flat at 103.48 after rising to the highest since Dec. 13 at 103.82 in the previous session.
The US rate futures market on Tuesday priced in a roughly 47% chance of a March rate cut, up from late on Monday, but down from as much 80% about two weeks ago, according to LSEG’s rate probability app.
For 2024, futures traders are betting on five quarter-point rate cuts. Two weeks ago they expected six.
In the last comments before Fed officials entered a blackout period ahead of their Jan. 31 policy decision, San Francisco Fed President Mary Daly said Friday she believes monetary policy is in a “good place” and it is premature to think rate cuts are imminent.
Earlier that week, Fed Governor Christopher Waller said policymakers would move “carefully and slowly”, which traders took as pushing back at pricing for a speedy fall in rates.
“Markets have been correcting from the narrative that rate cuts were incoming and incoming quickly,” leading to dollar strength, said James Kniveton, senior corporate FX dealer at Convera.
“This follows a general pattern of resistance to inflation reduction the closer central banks get to their final target, and has caused a rethinking of how fast monetary policy would return to lower levels,” he added.
“We have seen ECB (European Central Bank) officials push back on rate cut expectations as well, in line with the Federal Reserve.”
Dollar struggles to retain gains even as March rate cut odds recede
The ECB decides policy on Thursday.
No change in interest rates is expected, but investors will watch the tone of the statement and central bank chief Christine Lagarde’s press conference for clues on where rates are headed.
The euro was flat at $1.08565, after slipping as low as $1.0822 on Tuesday for the first time since Dec. 13. Sterling was slightly higher at $1.2694, making up some ground following an overnight dip of 0.2%.
The Bank of England announces its policy decision on Feb. 1.
The Japanese yen gained some ground on Wednesday, following a volatile session a day earlier, after the BOJ opted to keep stimulus settings unchanged, as expected, but central bank head Kazuo Ueda hinted at a possible end to negative rates in April or even March.
The dollar declined 0.17% to 148.085 yen, after swinging from as low as 146.99 and as high as 148.70 on Tuesday.
The Bank of Canada meets on policy on Wednesday, and is expected to leave its key overnight rate unchanged at a 22-year high of 5%.
The greenback was flat at C$1.3462, after slipping 0.15% on Tuesday.
China’s yuan was steady in offshore trading at 7.1660 per dollar, keeping close to a nearly two week high of 7.1635 from Tuesday, when Bloomberg reported that Chinese policymakers are seeking to mobilise about 2 trillion yuan ($278.86 billion) as part of a stabilisation fund to support the ailing stock market.
Elsewhere, cryptocurrency bitcoin steadied at just above $40,000 after sliding as low as $38,505 on Tuesday for the first time since Dec. 1.
Traders have unwound bullish positions built up in anticipation of US approval of the country’s first spot bitcoin exchange traded fund (ETF).
Bitcoin had surged to a record $49,048 on Jan. 11, a day after the approval, but tumbled as low as $41,509 in the subsequent session as traders dumped the token in a textbook sell-the-fact move.
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