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Dollar slips on Fed rate cut prospects

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The dollar index was 0.116 per cent down at 103.33, after clocking its weakest monthly performance in a year in November, despite a 0.6 per cent rise overnight

The dollar slipped on Friday as traders weighed data that showed inflation was easing, stoking expectations that interest rates had peaked and central banks would soon start cutting rates.

The dollar index, which measures the U.S. currency against six peers, was 0.116 per cent down at 103.33, after clocking its weakest monthly performance in a year in November, despite a 0.6 per cent rise overnight.

Data on Thursday showed U.S. consumer spending increased moderately in October, while the annual rise in inflation was the smallest in over 2-1/2 years.

The eagerly awaited PCE price index increased 3 per cent in October from a year ago, moderating from a three-month string of 3.4 per cent readings though still above the Fed’s 2 per cent target.

While the 3 per cent level remains too high to announce victory on inflation, it marks a fresh low for the series that will likely please the Federal Reserve and lower any pressure to implement further hikes, said Ryan Brandham, head of global capital markets, North America, at Validus Risk Management.

It remains to be seen if getting from 3 per cent to 2 per cent will be easy, or if inflation will remain sticky in 2024, Brandham said.

Markets are pricing in a 97 per cent possibility of the Federal Reserve standing pat in its December meeting, according to the CME FedWatch tool, with a 46 per cent possibility of a rate cut in March next year compared with a 27 per cent chance last week.

Investors’ focus will now move to comments from Fed Chair Jerome Powell later on Friday, with traders likely to hear carefully to sketch out rate outlook.

We expect Powell to reiterate the possibility of further tightening and dampen expectations of rate curbs, stated Carol Kong, currency strategist at CBA.

Kong said: Further loosening of financial conditions may undermine the FOMC’s (Federal Open Market Committee) efforts to tame inflation pressures. That said, we do not expect the FOMC to tighten policy again.

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