By Ankur Banerjee and Stefano Rebaudo
(Reuters) – The dollar hovered near a seven-month low on Tuesday on bets that the U.S. central bank will cut interest rates from next month, with traders bracing for comments from Fed Chairman Jerome Powell on Friday .
The dollar’s weakness pushed the euro to its highest level this year, while sterling neared a monthly peak. The MSCI emerging markets currency index also reached a record high.
The Swedish krona fell after the central bank cut rates by 25 basis points (bps) and forecast two or three further easing measures in 2024. The Swedish krona last fell 0.33% to 10.27 against the US dollar.
This week’s focus will be on Powell’s speech at an annual meeting of central bankers in Jackson Hole, but the spotlight will also be on the minutes of the Fed’s latest meeting, scheduled for Wednesday.
Some analysts say the coming weeks will likely be decisive in whether the Fed will cut by 50-75 basis points this year or by 150 basis points or more. The Jackson Hole conference is the Fed’s first opportunity to oppose the likelihood of a 50 basis point rate cut at one of its three remaining meetings this year, they added.
While the deterioration in the labor market led to expectations for a bigger rate cut in September, data has since been mixed with positive retail sales, indicating that consumer demand remains resilient.
Still, the US economy remains “vulnerable to a recession if a financial shock occurs,” said Thierry Wizman, Global Forex and Rates Strategist at Macquarie.
“But that financial shock may not come,” he added. “In that case, we could remain at below-trend growth and look ‘peaky’ until the Fed provides sufficient easing.”
Markets are pricing in a 24.5% chance of a 50 basis point cut in September, down from 50% a week ago, with a 25 basis point cut having odds of 75.5%, it showed the CME FedWatch Tool. Traders are expecting a total cut of 93 basis points this year.
A slim majority of economists polled by Reuters expect the Fed to cut rates by 25 basis points at each of its remaining three meetings.
The euro last traded at $1.1077 on Tuesday after reaching $1.1087, its highest level since December 28 in early trading. The common currency is up 2.4% this month, on track for its strongest monthly performance since November.
The , which measures the U.S. currency against six rivals, was last at 101.86 after hitting its lowest point since Jan. 2 at 101.76 earlier on Tuesday. The index fell more than 2% in August and is in the red for the second month.
Expectations for a US rate cut also pushed the Australian and New Zealand dollars to their highest levels in one month.
UEDA WAIT
The Japanese yen was slightly weaker at 146.98 per dollar, still close to the nearly two-week high it reached in the previous session, but off the seven-month high of 141.675 it reached in early August.
Interventions by Tokyo early last month and a surprise rate hike have pulled the yen away from the 38-year low of 161.96 it was stuck at in early July, and wrong-footed investors who have sharply scaled back their bets against the yen .
Investor attention will turn to Kazuo Ueda, governor of the Bank of Japan, when he appears in parliament on Friday. Ueda is expected to discuss the BOJ’s decision last month to raise rates and the focus will be on whether he maintains his recent hawkish tone.
Claudio Wewel, strategist at Bank J. Safra Sarasin, said the yen’s pace of appreciation is likely to be more gradual as data shows most speculative short positions have been cleared.
The latest weekly data through August 13 shows that leveraged funds – typically hedge funds and various types of money managers – have reversed their long-standing short yen position and are now net long for the first time since March 2021.
Barclays recalled that monthly data showed retail investors halved their net short US dollar/yen positions in July, as the yen recovered amid a revival of BOJ expectations for rate hikes.
