Dollar is defensive as markets weigh US interest rate expectations

Dollar is defensive as markets weigh US interest rate expectations

Written by Ankur Banerjee

SINGAPORE (Reuters) – The dollar was held back on Friday by uncertainty over the path of U.S. interest rates, while the euro held on to gains overnight as data suggested the slowdown in the euro zone may be easing.

With US markets closed on Thursday and a shorter trading session scheduled for Thanksgiving on Friday, currencies are likely to trade tight but with some volatility as liquidity is expected to remain thin.

The dollar index, which measures the greenback against six peers, fell 0.029% to 103.73, remaining close to the 2-1/2-month low of 103.17 it touched earlier this week.

The index fell 2.8% during the month, on track for its weakest monthly performance in a year amid growing expectations that the Federal Reserve is done raising interest rates and could start cutting rates next year.

Markets have lowered their expectations for a Fed rate cut in 2024, with futures now showing a 26% chance the Fed will cut its interest rate target at its March 2024 policy meeting, according to CME Group’s FedWatch tool. This compares to a 33% chance last week.

The euro settled at $1.0904, after rising 0.16% overnight after a series of preliminary polls showed that the recession in Germany may be less than expected, which offset a pessimistic reading of French business activity.

Meanwhile, core consumer price growth in Japan rose slightly in October, after falling the previous month, reinforcing investors’ views that stubborn inflation may prompt the Bank of Japan to pull back on monetary stimulus soon.

Economists at ING said they expect the Bank of Japan to move away from its ultra-accommodative stance next year.

“We believe the Bank of Japan may cancel its yield curve program as early as the first quarter of next year, as Japanese government bonds appear to have stabilized…Then the first rate hike will begin in the second quarter of 2024 if wage growth continues to accelerate in Next year.”

The Japanese yen strengthened 0.04 percent to 149.49 yen to the dollar. The Asian currency has slowly crawled away from the 33-year low of 151.92 it touched at the beginning of last week, and has risen 1.5% over the month.

A business survey showed on Friday that factory activity in Japan contracted for the sixth straight month in November, while there was little change in modest growth in the services sector, highlighting the fragility of the economy amid weak demand and inflation.

The pound sterling recorded $1.2539 in recent transactions, rising 0.05% during the day. The Australian dollar rose 0.14 percent to $0.657, while the New Zealand dollar rose 0.07 percent to $0.605.

Cash Treasuries resumed trading in Asia after Japan’s holiday on Thursday, with the yield on the 10-year Treasury note rising 2.9 basis points to 4.445%.

The yield on 30-year Treasury bonds rose 2.8 basis points to 4.576%.

(Reporting by Ankur Banerjee in Singapore; Editing by Jacqueline Wong)

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