By Stefano Rebaudo
(Reuters) – The U.S. dollar was just above a seven-week high on Monday after a rally fueled by strong U.S. employment data on Friday and an escalation of conflict in the Middle East.
The dollar’s rise followed a US jobs report in September that showed the biggest jump in six months, a drop in unemployment and solid wage gains. All this points to a resilient economy and is forcing markets to lower prices for Federal Reserve rate cuts.
Many factors that weighed on the dollar over the summer had reversed, analysts said. They cited waning concerns about a recession and price action suggesting the limits of pricing. A mild response function was achieved with this data set.
“We see no reason to rebuild structural short positions in the US dollar in the coming weeks,” said Francesco Pesole, forex strategist at ING.
“Markets appear to have given up on a further 50 basis point cut, and inflation rates should not change that, and while the situation in the Middle East may not escalate further, the consensus seems to be that a material de-escalation is not likely for the time being. ”, he added.
The benchmark against major sector peers rose 0.05% to 102.60. It rose to a seven-week high of 102.69 on Friday, posting a gain of more than 2% for the week, the biggest in two years. At the beginning of last week it was just over 100.
MUFG notes that this is the second time the dollar index has fallen back to support at the 100.00 level in recent years. On the last occasion, in July 2023, the dollar index tested but failed to break below the 100.00 level before staging a strong recovery (+7.8%) over the following three months.
“The size of fiscal stimulus in China, which would mainly help economies outside the US, will be one of the key factors impacting the dollar in the near term, along with macro data that could influence the Fed’s policy path” , said Lefteris Farmakis. , forex strategist at Barclays.
China is about to announce the details of its budget plan to stimulate the economy.
In the Middle East, Israel bombed Hezbollah targets in Lebanon and the Gaza Strip on Sunday, ahead of the one-year anniversary of the October 7 attacks that sparked the war. Israel’s Defense Minister also stated that all options were open for retaliation against arch-enemy Iran.
The euro stood at $1.0970, down 0.06%.
“Effective fiscal measures in Italy and France would benefit the euro at the margin, as they strengthen the sovereign’s creditworthiness and thus the credibility of the euro area project,” Barclays’ Farmakis argued.
The two countries, which are subject to a so-called excessive deficit procedure by the European Union, are taking measures to reduce their budget deficits.
The yen fell marginally to reach 149.10 per dollar, its weakest level since August 16, before paring losses to around 148.60. That came on top of a decline of more than 4% last week, the largest weekly percentage decline since early 2009.
The yen’s underperformance also reflects last week’s comments from new Prime Minister Shigeru Ishiba, who raised expectations that interest rate hikes in Japan are even further away.
hit a new two-month high at 4.016% in London trading.
However, Barclays believed there is room to rise by around 20 basis points even after taking into account the worst case of downside economic scenarios, arguing that recent employment data has reinforced its belief in a long and gradual Fed easing cycle.
BofA now forecasts that the Fed will cut by 25 basis points per meeting through March 2025, and then by 25 basis points per quarter through the end of 2025.
Markets expect the Federal Reserve to cut rates by just 25 basis points in November, down from 50 basis points, on the back of the jobs data. They now estimate a 95% chance of a quarter-point cut, up from 47% a week ago, and a 5% chance of no cut at all, according to CME’s FedWatch tool
The pound sterling fell 0.4% against the dollar.
It posted its biggest daily fall since April last week after comments from Bank of England Governor Andrew Bailey triggered a substantial unwinding of stretched net long positions in pounds, making the British currency more vulnerable to shifts in sentiment.
