Karen Brettell
NEW YORK (Reuters) – The index was on track for its first weekly decline in 2024 on Friday as investors took a break from currency buying after a nearly two-month rally driven by expectations that the Federal Reserve will cut rates later than previously expected. .
Investors pushed back expectations for the Fed’s first rate cut from May to June and sharply reduced how far they think the U.S. central bank will cut its benchmark rate. Fed officials had forecast three cuts of 25 basis points this year, while markets had forecast as many as seven.
“The dollar rally this year has been based on markets returning to the Fed,” said Mark Chandler, chief market strategist at Bannockburn Global Forex in New York.
Traders can also look forward to the possibility that economic data will begin to slow.
“I think that starting with the February jobs data due March 8, we will see a series of weaker U.S. economic data,” Chandler said.
Personal consumption expenditures (PCE) data due next week could also provide clues to Fed policy.
New York Fed President John Williams believes the US central bank is on track to cut interest rates “later this year” despite stronger-than-expected inflation and labor market data in January, according to an interview published Friday Axios.
The price was little changed on Friday at 103.93, for a weekly loss of 0.34%. It bounced off a five-month low of 100.61 on Dec. 28 and is holding below a three-month high of 104.97 hit on Feb. 14.
The dollar has risen this year, helped by robust economic growth and Fed officials’ warnings against cutting rates too early as they seek to bring inflation back closer to its annual 2% target.
However, investors are now waiting for further economic data to provide further clues on monetary policy.
“It’s not time to sell the dollar yet, but we think it will start to weaken in the second quarter, assuming the Fed cuts rates in June and continues to cut rates quarterly,” said Athanasios Vamvakidis, global head of the G10 Forex group. . strategy at BofA Global Research.
BofA expects the euro to strengthen to 1.15 against the US dollar by the end of the year.
“If the US economy remains this strong, we will have to change our view as the Fed may not be able to cut rates in June or even this year,” Vamvakidis added.
Improved risk appetite, which sent stock markets in several countries to records this week, may also have dampened demand for the US currency, which is seen as a safe haven.
The euro remained virtually unchanged on the day at $1.0822. It fell from $1.11395 on December 28, but rose from $1.0695 on February 14.
German business morale improved in February, although likely not enough to prevent Europe’s largest economy sliding into a new recession, a survey showed on Friday.
ECB President Christine Lagarde on Friday said relatively benign fourth-quarter wage growth data was encouraging but not enough to give the European Central Bank confidence that inflation had been beaten.
JENA WORST PERFORMER
The yen is the worst-performing G10 currency this year, with the US dollar gaining 6.7% against the Japanese currency. On Friday, the dollar fell 0.04% to 150.45 yen.
The Japanese currency is heading for a fourth week of declines as investors chased higher yields almost everywhere, betting that Japanese rates will remain near zero for some time.
As the Fed is expected to keep rates higher for longer, investors continue to engage in carry trades, in which they sell or borrow the yen and invest in higher-yielding currencies.
“For dollar/yen to weaken, we need the Fed to start cutting rates,” said BofA’s Vamvakidis.
In cryptocurrencies, Bitcoin fell 1.01% to $51,122.