By Karen Brettell
NEW YORK (Reuters) -The dollar recovered from a 13-month low against the euro on Thursday before Fed Chairman Jerome Powell was due to speak on Friday and the dollar’s recent weakness was seen as exaggerated.
The U.S. currency has fallen on concerns about a weakening economy and expectations that the Federal Reserve is about to cut interest rates. But the extent of the weakness, and whether it will prompt the U.S. central bank to cut rates by 25 or 50 basis points at its September meeting, remains in doubt.
The odds of a cut of 50 basis points or more have risen after the July employment report showed lower-than-expected job growth and an unexpected rise in the unemployment rate, although this pricing has faded as other data points to better growth.
“The dollar has been under a lot of pressure lately, but I think it’s getting to a point where it’s quite oversold,” said Brad Bechtel, global head of FX at Jefferies in New York.
“We’ve pulled back a little bit from that kind of state of emergency that we got into after the wage squeeze, but the dollar seems to be pricing like we’re still in that state of emergency,” Bechtel said.
A massive unwinding of carry trades, where traders borrowed yen to finance purchases of U.S. assets, added to the market moves after the payroll report and made the rate cuts more extreme.
Traders are now pricing in a 25% chance of a 50 basis point cut next month, up from 38% on Wednesday, and a 75% chance of a 25 basis point cut, according to CME Group’s (NASDAQ:) FedWatch Tool.
Traders will focus on Powell’s comments Friday at the Kansas City Fed’s symposium in Jackson Hole, Wyoming, for new clues about the size of the expected rate cut in September and whether subsequent cuts are likely at any meeting after that.
Powell may be reluctant to provide too much detail, however, as the August jobs and inflation data will come after his speech but before the September 17-18 meeting.
Minutes of the July 30-31 Fed meeting released Wednesday showed a “vast majority” of officials saying a September cut was likely.
Philadelphia Fed President Patrick Harker said Thursday he agreed to a rate cut in September as long as the data perform as he expected. Susan Collins, president of the Boston Fed, also signaled her likely support.
Data on Thursday showed the number of Americans filing new claims for unemployment benefits rose over the past week, but the level still suggested a gradual cooling in the labor market remains intact.
It comes a day after revised data for the full year through March showed US employers created far fewer jobs than originally reported.
With Europe and the United Kingdom also facing soft growth prospects and central bank interest rate cuts, Bechtel said the dollar’s weakness against their currencies may have gone too far.
“There is no real reason for major outperformance on the euro side at the moment. I would argue much the same in Britain,” he said. “Ultimately, the Fed, the European Central Bank and the Bank of England will be in the same ballpark when it comes to their easing cycles.”
The latter rose 0.38% to 101.50. On Wednesday it reached 100.92, the lowest level since December 28. The euro fell 0.36% to $1.111. On Wednesday, the price was $1.11735, the highest level since July 2023.
Data earlier on Thursday showed eurozone business activity was surprisingly strong in August, despite companies raising prices, while negotiated wage growth in the eurozone slowed last quarter.
Sterling hit a 13-month high against the dollar after a report showed British business activity accelerated this month and cost pressures eased to their lowest in more than three years.
Sterling last rose 0.02% to $1.3093, after previously reaching $1.3130. It is approaching the peak of $1.3144 reached in July 2023, which if broken would take it to the highest level since April 2022.
The dollar strengthened 0.65% to 146.2 Japanese yen.
Bank of Japan Governor Kazuo Ueda is expected to discuss the central bank’s decision last month to raise interest rates when he appears in parliament on Friday.
In cryptocurrencies, bitcoin fell 1.43% to $60,370.
