Dollar set for best week in a month on cautious Fed outlook
for 2025
DXY
−0.06%
USDJPY
+0.67%
GBPUSD
−0.50%
EURUSD
+0.31%
Key points:
Dollar heads for strongest week in a month
Yen weakens as BOJ seen likely to skip hike next week
Euro, Swiss franc slightly higher after rate cuts
The dollar headed for its best weekly performance in a month
on Friday, as investors priced in the possibility of the Federal Reserve
cutting rates more slowly next year, while sterling fell after a surprise
contraction in UK economic activity.
The U.S. currency also rose against the yen after reports
that the Bank of Japan could forgo a rate hike at its meeting next week.
The dollar index
DXY
, which measures the currency against six others, was up
0.037% at 107, set for a weekly gain of nearly 1%, its biggest in a month.
U.S. data on Thursday showed the job market is gradually
cooling in line with expectations, while producer price inflation helped
reinforce the market's current scenario of a Fed cut on Dec. 18, but a slower
pace of reductions in 2025.
Markets fully expect a cut at the upcoming meeting, but only
price a roughly 24% chance of another one in January, with March the most
likely point for another move, according to CME's FedWatch tool.
"I think there will likely be a long pause, perhaps for
all of the first quarter of the year from the Fed and then maybe just an
incremental interest rate cut here and there as the central bank tries to
refine its policy," said Matt Weller, head of market research at StoneX.
San Francisco Fed President Mary Daly, for example, said
this month that she was comfortable cutting rates in December, but advocated
"a more thoughtful and cautious approach" on further reductions.
The dollar rose 0.69% to 153.695 yen
USDJPY
, its highest since late November. The yen has been the
worst performer this week against the dollar, which has gained 2% on the
Japanese currency.
Traders see just a 23% chance of a quarter-point hike by the
BOJ on Dec. 19, following reports by Reuters and Bloomberg that pointed to
officials forgoing tightening this time in order to wait for more evidence of
wage growth and see how U.S. policy takes shape under incoming president Donald
Trump.
"While the outcome is uncertain, one thing is clear: a
hike exceeding 15 bps would likely trigger a downside move in dollar/yen as the
yen strengthens," City Index market analyst David Scutt said.
"On the other hand, if the BoJ keeps rates unchanged,
there’s a solid chance of a knee-jerk upside reaction."
EUROPE UNDER PRESSURE
In Europe, the pound
GBPUSD
fell after data
showed the UK economy shrank unexpectedly in October, adding to signs of a
bigger-than-expected slowdown. The Office for National Statistics said the
economy contracted 0.1% in October, compared with forecasts in a Reuters poll
for growth of 0.1%.
Sterling was last down 0.45% at $1.2616, around its weakest
since the start of the month.
The euro
EURUSD
pared earlier losses
against the dollar and rose 0.26% to $1.04945. The European Central Bank on
Thursday cut rates by 25 basis points and kept the door open to further easing.
The Swiss franc
USDCHF
remained under
pressure after the central bank's shock half-point rate reduction the day
before. The Swiss franc was last nearly flat at 0.89265 francs.
Rate cuts and the threat of the U.S. imposing tariffs have
Canada's dollar
USDCAD
pinned to a 4-1/2
year low.
The Chinese yuan
USDCNH
held at 7.281 per
dollar in the offshore market. Reuters reported this week China is considering
allowing its currency to fall further to counter the impact from any U.S. trade
war.
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